Orange Sdn Bhd is a subsidiary of Sammy Publishing and specializes in the publication and distribution of reference books. Orange's sales for the past years exceeded RM18 million, and the company employed an average of 65 employees. Sammy periodically sends a member of internal audit department to audit the operations of each of its subsidiaries, and Karina Ford, Orange's treasurer, is currently working with Ralph Jonson of Sammy's internal audit staff. Johnson has just completed a review of Orange's investment cycle and prepared the following report. General Throughout the year, Orange has made both short-term and long-term investments in securities; all securities are registered in the company's name. According to Orange's bylaw, its board of directors must approve long-term investment activity, whereas either the president or the treasurer may approve short-term investment activity. Transactions The treasurer made all purchases and sales of short-term securities. The board approved the long-term security purchases, whereas the president approved the long-term security sale. Because the treasurer is listed with the broker as the company's contact, this individual received all revenue from these investments (dividend and interest) and then forwarded the cheque to accounting for processing. Documentation The treasurer maintains purchase and sale authorization, along with the broker's advices. The certificates for all long-term investment are kept in a safe deposit box at the local bank; only the president of Orange's has access to this box. An inventory of this box was made, and all certificates were accounted for, Certificates for short-term investments are kept in a locked box in the accounting office. Other documents, such as long-term contracts and legal agreement, are also kept in this box. The president, the treasurer, and the accounting manager have three private keys to the box. The accounting manager's key is available to all accounting personnel should they require documents kept in this box. Documentation for two of the current short-term investment could not be located in this box; the accounting manager explained that some of the investments are for such short periods of time that the investments are for short periods of time that the broker does not always provide formal documentation. Accounting Records The accounting department records deposits of cheques for interest and dividends earned on investments, but these cheques could not be traced to the cash receipts journal, which is maintained by the individual who normally opens. Stamps, and logs incoming cheques. These amounts are journalized monthly in an account for investment revenue. The treasurer authorizes cheque drawn for investment purchases. Both the treasurer and the president must sign cheques in excess of RM15,000. When securities are sold, the broker deposits the proceeds directly in Oakdale's bank account by electronic funds transfer. Each month, the accounting manager and treasurer prepare the journal entries required to adjust the short-term investment account. There was insufficient backup documentation attached to the journal entries reviewed to trace all transaction; however, the balance in the account at the end of last month closely approximates the amount shown on the statement received from the broker. The amount in the long-term investment account is correct, and the transactions can be clearly traced through the documentation attached to the journal entries, the are no attempts made to adjust either account to the lower of aggregate cost market. The company believes to achieve Sammy Publishing's objectives of sound internal control the four basic controls should be implemented. The four basic internal controls are authorization of transactions, complete and accurate record keeping, access control and independent verification should be implemented for effective system. Required: a) Describe the purpose of each of the FOUR (4) control listed. (8 marks) (CLO1:PLO1:C2) b) Discuss an area in Orange's investment procedures that violates each of the FOUR (4) controls listed. (12 marks) (CLO1:PLO1:C2) c) Describe how Orange can correct each weakness from each violations identified based on your answer (b). (10 marks) (CLO1:PLO1:C2) d) Explain the different between exposure and risk on above situation. (8 marks) Orange Sdn Bhd is a subsidiary of Sammy Publishing and specializes in the publication and distribution of reference books. Orange's sales for the past years exceeded RM18 million, and the company employed an average of 65 employees. Sammy periodically sends a member of internal audit department to audit the operations of each of its subsidiaries, and Karina Ford, Orange's treasurer, is currently working with Ralph Jonson of Sammy's internal audit staff. Johnson has just completed a review of Orange's investment cycle and prepared the following report. General Throughout the year, Orange has made both short-term and long-term investments in securities; all securities are registered in the company's name. According to Orange's bylaw, its board of directors must approve long-term investment activity, whereas either the president or the treasurer may approve short-term investment activity. Transactions The treasurer made all purchases and sales of short-term securities. The board approved the long-term security purchases, whereas the president approved the long-term security sale. Because the treasurer is listed with the broker as the company's contact, this individual received all revenue from these investments (dividend and interest) and then forwarded the cheque to accounting for processing. Documentation The treasurer maintains purchase and sale authorization, along with the broker's advices. The certificates for all long-term investment are kept in a safe deposit box at the local bank; only the president of Orange's has access to this box. An inventory of this box was made, and all certificates were accounted for, Certificates for short-term investments are kept in a locked box in the accounting office. Other documents, such as long-term contracts and legal agreement, are also kept in this box. The president, the treasurer, and the accounting manager have three private keys to the box. The accounting manager's key is available to all accounting personnel should they require documents kept in this box. Documentation for two of the current short-term investment could not be located in this box; the accounting manager explained that some of the investments are for such short periods of time that the investments are for short periods of time that the broker does not always provide formal documentation. Accounting Records The accounting department records deposits of cheques for interest and dividends earned on investments, but these cheques could not be traced to the cash receipts journal, which is maintained by the individual who normally opens. Stamps, and logs incoming cheques. These amounts are journalized monthly in an account for investment revenue. The treasurer authorizes cheque drawn for investment purchases. Both the treasurer and the president must sign cheques in excess of RM15,000. When securities are sold, the broker deposits the proceeds directly in Oakdale's bank account by electronic funds transfer. Each month, the accounting manager and treasurer prepare the journal entries required to adjust the short-term investment account. There was insufficient backup documentation attached to the journal entries reviewed to trace all transaction; however, the balance in the account at the end of last month closely approximates the amount shown on the statement received from the broker. The amount in the long-term investment account is correct, and the transactions can be clearly traced through the documentation attached to the journal entries, the are no attempts made to adjust either account to the lower of aggregate cost market. The company believes to achieve Sammy Publishing's objectives of sound internal control the four basic controls should be implemented. The four basic internal controls are authorization of transactions, complete and accurate record keeping, access control and independent verification should be implemented for effective system. Required: a) Describe the purpose of each of the FOUR (4) control listed. (8 marks) (CLO1:PLO1:C2) b) Discuss an area in Orange's investment procedures that violates each of the FOUR (4) controls listed. (12 marks) (CLO1:PLO1:C2) c) Describe how Orange can correct each weakness from each violations identified based on your answer (b). (10 marks) (CLO1:PLO1:C2) d) Explain the different between exposure and risk on above situation. (8 marks)