The internal auditors for a transportation company investigated four areas of that company. These areas were:

1. Collections of accounts receivable.

2. Purchase of fuel from wholesale suppliers for the company's fleet of trucks.

3. Sale of used trucks at auctions.

4. Purchase of advertising in the mass media.

The auditors determined that the total exposure to loss in accounts receivable was \(\$ 7.8\) million, the total exposure to loss in the purchase of fuel was \(\$ 36\) million, possible losses from sales of used trucks were estimated to be \(\$ 3\) million, and possible losses in the purchase of advertising were estimated to be \(\$ 2\) million during the year. In each case the figure is based upon the estimated possible annual loss. After a brief evaluation of internal controls, the auditors estimated that control over receivable collections was excellent, over fuel purchases - excellent, over the sale of used trucks - good, and over purchases of advertising - extremely poor.

Required:

a. How would you rank the risks of the four areas, based only upon the amount of exposure to loss?

b. Using the following probabilities associated with the quality of internal control, how do your rankings change, if at all? Why?

c. Name at least one possible way that the losses could occur in each of the four areas.

Transcribed Image Text:

Internal Control Excellent Very Good Good Average Fair Poor Extremely Poor Probability of Loss .02 .15 .25 .50 .75 .85 .98