Background Spyglass a medium-size company in the security equipment business. Spyglass is a wholesaler which sells products such as video surveillance systems, alarm systems, keyless lock systems and lighting systems for small businesses. Spyglass is a publicly traded company. The company's current annual revenues are $150 million. Elvis McGraw became the company's Chief Executive Officer (CEO) eight years ago. Mr. McGraw is a "hands-on" executive who was eventually given the additional title of Chairman of the Board. Branch operations are conducted in all states east of the Mississippi. Spyglass's annual purchase volume approximates $100 million. Purchasing and accounts payable are handled by the corporate office in Chicago, Illinois. Spyglass deals with over 1,000 different vendors. Fifteen thousand (15,000) checks are processed annually. Even though Mr. McGraw considers internal auditors "bean counters," Spyglass established an internal audit function a year ago. Given Mr. McGraws doubts about internal audit, the department is working hard to build credibility. Initially the CAE decided to perform financial audits and then expand into more complex audit engagements. Internal auditing recently completed an audit engagement covering accounts payable. The information gathered during the audit is summarized below. Information Gathered During Audit 1. Turnover among Spyglass employees has been about 25% per year. This condition is not unusual in Spyglass's industry although Spyglass is at the higher end of the range. The company has employed each of the six accounts payable clerks for anywhere from 14 months to three years. The supervisor has been in her position for four years. 2. There is a job rotation process. Accounts payable assigns each clerk to a different function every 12 months. 3. Spyglass has written policies for purchasing and accounts payable. There is no documentation for either function which describes in detail the procedures needed to accomplish specific jobs effectively and accurately. 4. Approximately 25% of the invoices processed do not have a purchase order and receiving report. Accounts payable processes these invoices based on an authorized approver list. The authorized approver signs the invoice and forwards to accounts payable for payment. 5. The accounts payable supervisor assigns vendor codes. Purchasing has no responsibility for assigning vendor codes or providing information to accounts payable to set up a vendor code. The supervisor may do some checking, but mostly she relies on the approval appearing on the invoice, or the purchase order as the basis for adding a new vendor to the master file. A review of the vendor master file shows that many records are incomplete (e.g., missing phone numbers, missing or incomplete addresses, etc.). 6. One quarter of all active vendors in the vendor master file have had no invoices or payments processed for over two years. 7. One-time vendors are vendors that supply a company only once or very rarely. For these vendors, accounts payable does not add a record to the vendor master. A separate transaction is used in the accounts payable application to create a special vendor number to process the invoice for payment. There is an audit trail; therefore, payments are traceable to the vendor. 8. Accounts payable clerks can only access the purchasing level requiring the lowest authority in the software package. The application audit log showed seventeen rejected access attempts to add a new vendor over a two-day period. During this period, the accounts payable supervisor, who normally performs this function, was on vacation. The person(s) trying to execute the transaction to add a new vendor was logged into the application. The security report sent daily to the accounts payable supervisor lists the invalid access attempts. 9. The accounts payable supervisor has system administrator authority in the accounts payable application. In addition to maintaining the vendor master, she also reconciles the bank accounts. 10. After the checks are processed and signed, which takes place at the same time they are printed, the checks are sent to the mailroom for distribution. 11. One of the accounts payable clerks is having her wages garnished due to a federal government collection action involving a student loan. During her employment interview, the applicant told the HR interviewer that she had no debts. This clerk is responsible for processing employee expense payments. 12. All entries in the accounts payable application are automatically posted in summary form to the general ledger. 13. Spyglass lost $12,000 in early payment discounts in the last fiscal year by failure to pay by the discount deadline. 14. Corporate accounting does any reconciliations of monthly statements from vendors. 15. Spyglass is in the process of moving their purchasing and accounts payable systems to a cloud vendor. Spyglass would like to be able to receive vendor invoices electronically and replace most checks with electronic payment. Because Spyglass lacks in-house expertise, they are relying on an outside consulting firm to manage and staff the project. Required You are to write a portion of an audit report based on the facts in this case. Your report will include the executive summary, findings, and recommendations. 1. Write an executive summary of your findings and recommendations. What are the key issues you want to get across to senior management? What is your overall conclusion? 2. Based on the results of the internal control review and tests conducted, develop a list of audit findings. For each finding indicate the probable underlying cause and possible financial impact to Spyglass. 3. Develop a list of recommendations to correct the conditions noted during the audit.