Internal audit and control

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Miss Ophelia is a just graduated student in the accounting program of the CEGEP MV. She is anxious to

start her new job this 15th of May 20x1 at Weather Inc., a Montreal based company, specialized in snow

removal services during the winter, and in landscaping services during summer times.

Mr. Winter is the CEO of Weather Inc. The company has 20 employees, including Mr. Winter, his wife

Mrs. Summer, and their 2 kids Mr. Snow and Miss Rain.

Mrs. Summer and kids are working at the office, when all the other employees are on the operation field.

Here is below the conversation Mr. Winter had with Miss Ophelia at her first day into Weather Inc.

Mr. Winter: We are very happy to welcome you into Weather Inc., a family based in Montreal since

1990.

You will join the office staff, along with Mrs. Summer, and my 2 kids Mr. Snow and Miss Rain.

Your Job will be especially to contribute into the day to day accounting tasks (data entry, etc.) You will

also help to implement internal audit and internal controls specifically into the administrative

department and into the company in general.

I know this is a huge responsibility, but it is very important to me because:

 I never know the exact amount of money into the bank account of Weather Inc.

 Some suppliers complain that their invoices had not been paid on time, and some even claim not to

have been paid at all. We are obliged to issue additional payments to those same suppliers.

 The level of our inventory of ice melting salt is not known. Sometimes staffs on the field complain not

to have enough salt left to perform properly their job.

 50% of the suppliers are paid cash, and the other 50% by wire transfer. Miss Rain, my daughter, is

responsible for entering the purchase invoices into the accounting system, and for issuing the online

and cash payments.

 My son Mr. Snow manages the cash. He receives the payments from the customers (cash and

cheques), do the deposits, and do the data entry of sales invoices and payments received. Mr. Snow

keeps in cash a part of the payments to pay the suppliers, and to incur the small expenditures.

 Mrs. Summer does the payroll. She compiles the timesheets, enters the payroll data into the

accounting system, and does the wire transfers to the employees’ bank accounts, including her.

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 Every year, Mrs. Summer issues the financial statements for internal purpose. She is the one

explaining everything to me because you know, financial matters are like ‘’Greek’’ to me.

 You will find on your desk the bank statements of April 20x1, the cash report from our accounting

system for the month of April 20x1, The pervious bank reconciliation of March 20x1, and the bank

reconciliation template.”

Part I: (25 points)

1. From the welcome conversation with Mr. Winter, help Miss Ophelia to identify 5 weaknesses of

internal control into Weather Inc. (10 lines maximum) (10 points)

2. Help Miss Ophelia to suggest 5 actions to implement into Weather Inc., to ensure that the basics of

internal control are present. (10 lines maximum) (10 points)

3. Mr. Winter would like to hire an internal auditor next year, to complete the office staff. Ophelia’s

best friend, Miss Joly, will graduate in accounting next fall. Miss Ophelia is thinking to ask Mr.

Winter to hire her. Ophelia and Joly will be a good team when working together, Ophelia thinks.

What are 5 principles and/or abilities of an internal auditor that should be met when hiring Miss

Joly? Explain (maximum 10 lines) (5 points).

Part II: (15 points)

1. To clarify her understanding of the administration of Weather Inc., help Ophelia to perform a bank

reconciliation as at April 20x1, based on the information available on her desk (see exhibits) (12

points).

2. Explain what could be the reasons (minimum 3 reasons) of the differences observed at first, before

the reconciliation, between the closing balances of the bank statement and the general ledger for the

month of April 20x1. (5 lines maximum) (3 points)

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Exhibits: Documents on the desk of Ophelia.

WEATHER INC.

BANK RECONCILIATION Bank account number 494 504 2

As at March 31st 20x1

Opening Balance March 1st 20x1 31500.00

Revenues (cash in) of the period

Expenses (cash out) of the period

Closing Balance March 31st 20x1 31500.00

Closing Balance from Bank statement (March 31 20x1) 34100.00

Plus received outstanding cheques 5000.00

Minus Paid outstanding payments

payment # 79 -5200 payment # 84 -2400

Closing Balance-Bank after adjustments (March 31 20x1) 31500.00

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Weather inc. General Ledger of Cash account # 494 504 2 As at April 20x1

Description date Debit Credit Balance

Opening Balance April 1st 20x1 31,500.00$ Total of deposits April 30th 20x1 23,320.00$ 54,820.00$ Total of payments April 30th 20x1 11,904.00$ 42,916.00$

Details of transactions in the books

Deposits Made Payments Made April 7th 8,000.00$ No. 91 800.00$ April 13th 1,120.00$ No. 92 1,120.00$ April 18th 6,400.00$ No. 93 1,896.00$ April 23th 400.00$ No. 94 3,100.00$ April 27th 3,600.00$ No. 95 170.00$ April 30th 3,800.00$ No. 96 640.00$ Total receipts April 20x1 23,320.00$ No. 97 480.00$

No. 98 640.00$ No. 99 258.00$ No. 100 2,800.00$ Total payments April 20x1 11,904.00$

Weather Inc. Bank Statement As At April 30th 20x1 Bank Of Montreal Account # 494 504 2

Balance Date Date

01-Apr 34,100.00$ No. 93 02-Apr 1,698.00$ 03-Apr 5,000.00$ 37,402.00$ No. 92 07-Apr 1,120.00$ 07-Apr 8,000.00$ 44,282.00$ No. 84 13-Apr 2,400.00$ 13-Apr 1,120.00$ 43,002.00$

NSF 18-Apr 824.00$ 18-Apr 6,400.00$ 48,578.00$ No. 95 23-Apr 170.00$ 23-Apr 400.00$ 48,808.00$ No. 99 27-Apr 258.00$ 27-Apr 3,600.00$ 52,150.00$ No. 98 30-Apr 640.00$ 30-Apr 3,800.00$ 55,310.00$ No. 97 30-Apr 480.00$ 30-Apr INT 94.00$ 54,924.00$ No. 94 30-Apr 3,100.00$ 51,824.00$

PMT 30-Apr 4,200.00$ 47,624.00$ INT 30-Apr 640.00$ 46,984.00$ SC 30-Apr 80.00$ 46,904.00$

Notes: NSF : Non sufficient funds SC: Service charge PMT : Principal payment of debt INT: interest payment of debt/ received on savings

Payments / Charges Deposits / credits

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Additional Information:

1. When checking the payments, Ophelia discovered that the payments # 93 of $ 896 has been

incorrectly entered as $1 896.

2. The NSF cheque of $824 was that of customer Jon Smith , deposited in April 20x1

Template Bank reconciliation

WEATHER INC.

BANK RECONCILIATION

Bank account number 494 504 2

As at April 30th 20x1

Opening Balance April 1st 20x1

Revenues (cash in) of the period

Expenses (cash out) of the period

Closing Balance April 30th 20x1 0.00

Closing Balance from Bank statement (April 30th 20x1)

Plus received outstanding cheques

Minus Paid outstanding payments

Closing Balance-Bank after adjustments (April 30th 20x1) 0.00

Difference

0.00