APPLYING THE COSO PRINCIPLES OF INTERNAL CONTROL

RESPOND WITH WHAT PRINCIPLE APPLIES. (1-17)

Each of the following describes an internal control problem. Based on your analysis of each situation, explain which of the seventeen principles of internal control is most likely not present:

1. After conducting a survey, you find out that employees feel underpaid and that their company is against collective bargaining.

2. You meet with the companys audit committee that is made up of a retired Big 4 partner, an SEC lawyer, a member of another companys board who serves on their audit committee as a financial expert, and the companys controller.

3. After holding a focus group with some employees, you find out that they feel that the companys code of ethics is a very effective public relations document.

4. Sweet Donuts Company hires a former Big 4 senior manager to head up a new internal audit department at the recommendation of its private equity investors in anticipation of it going public. After going public, the company fires all of its internal auditors and replaces them with an outsourced internal audit service that only has two unqualified employees.

5. A companys computer system gets hacked, and one million credit card accounts get stolen, including the three-digit security codes from the back of the cards. The company didnt find out about the theft until several of their customers credit cards were charged for thousands of dollars of unordered merchandise.

6. A company decides to diversify its product line based on a competitors actions and ends up losing a lot of money but is totally surprised by the outcome.

7. A company allows a trader to use a hedging scheme to offset possible losses on decreases in commodity prices only to find out 6 months after the employee quit that the trader was using company funds to speculate on the traders behalf and was about to lose several million dollars when a number of the futures trades were to close.

8. A companys accounting department significantly underestimates the level of bad debts for the quarter.

9. The internal audit staff at a publicly traded company is aware of a weakness that could be material but fails to report it to upper management because of concern that the deficiency involves upper management and that there might be retaliation.

10. Employees seem skeptical and even confused at times about how best to perform their jobs because of the amount of autonomy they have been given.