Internal Controls

For Internal Controls: A Compendium of Short Cases, reponses should be well written, in paragraph
form, using proper grammar and citations for any writing not your own.
Case 1
What were your initial thoughts of Jeff Smith’s performance as Controller? Given what
happened later in this case, are you surprised given your perception of Jeff Smith? Explain.
2. What internal controls could have been in place to prevent this from happening?
1.
Case 2
1. Describe the flaws in RME’s credit authorization process, and what recommendations you
would suggest to implement in the process.
2. As the auditor, what other information (not given in the case) might you inquire about related
to the overall sales cycle / process? Why would you be interested in such information?
Case 3
1. Use the questions as stated in the case (answer both).
Case 4
1. For purposes of evaluating internal controls, how does your client upgrading its accounting
software impact your audit risk? Explain.
2. Discuss the upsides and downsides of allowing remote access to the company’s system. Be
sure to include internal control considerations in your responses.
Case 5
1. What factors should an organization take into considerations when contemplating a keep inhouse vs outsource decision for a key process? Be sure to include at least some internal
control considerations in your response.
2. Describe at least three internal control weaknesses related to computer and data security at
AAA prior to the flood occurrence. For each weakness, make a suggestion of a control,
policy, procedure, etc as to what would have promoted stronger computer security.
Case 6
1. Describe how you as Controller would design the employee reimbursement process to avoid
the issues that occurred related to damaged vehicles subsequent to the accident at the local
plant.
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ISSUES IN ACCOUNTING EDUCATION
Vol. 25,No.4
2010
pp. 741-754
American Accounting Association
DOI: 10.2308/iace.2010.25.4.741
Internal Controls: A Compendium of
Short Cases
Constance M. Lehmann
ABSTRACT: The importance of a strong internal control system is a central theme in
auditing and accounting information systems courses, taking on even more importance
with the enactment of the Sarbanes-Oxley Act of 2002. Effective enterprise gover­
nance, the fulfillment of management objectives, and minimizing the opportunity for
fraudulent activity are positively associated with the strength of the internal control
system of a company (Peterson and Zikmund 2004). Six short, open-ended internal
control cases are presented here. One or more of the. cases can be utilized in auditing
or accounting information systems courses. These cases address the following control
issues: (1) hiring practices, (2) weaknesses in credit authorization procedures, (3) ben­
efits and risks of new technology, (4) benefits and risks of remote access, (5) disaster
recovery/business continuity plans, and (6) procedures for employee reimbursements.
The cases can be used in small group or individual settings in traditional auditing
classes, auditing classes with IT or internal audit emphasis, or accounting information
systems classes.
Keywords: internal control; risk assessment; case studies; problem-based learning.
Data Availability: Contact author.
T
INTRODUCTION
he purpose of a strong internal control system is to reassure users of the reliability of the
information in an organization’s financial statements. A strong control system strengthens
enterprise governance, allows management objectives to be achieved, and mitigates the risk
of fraud by increasing employee perception of detection (Peterson and Zikmund 2004). Stakehold­
ers want to feel confident that the organization is being run effectively and efficiently to preclude
the possibility of fraudulent financial reporting or business failure. In addition, boards of directors,
audit committees, and external auditors are expecting organizations to have strong internal control
systems to reduce the opportunity for management wrongdoing, and to reflect good enterprise
governance practices.
Constance M. Lehmann is an Associate Professor of Accounting at the University of Houston-Clear La,ke.
The author thanks Dana Lear, David· Sheridan, Rachelle Han, Jeff Nash, Lisha Shen, and Anita Chako for providing the
frameworks for the cases. I also thank Carolyn Strand-Norrnan and Randall Xu for their assistance in testing the cases and
collecting feedback from the students. Freeman Mendell and Paul Fitch provided valuable input for several of the cases.
Feedback from attendees of the A!S Educators Conferences in 2006 and 2007 also helped in the development of the cases.
In addition, comments from two anonymous reviewers and the editor contributed significantly to the improvement of this
manuscript.
Published Online: November 2010
741
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Lehmann
Internal Controls and the External Auditor
The Foreign Corrupt Practices Act (FCPA 1977) requires publicly held companies to maintain
an internal control system. External auditors must provide an opinion as to the fairness of the
financial statements, as well as an attestation statement responding to management’s assertions
regarding internal controls over finan