Safe-and-Secure is in the home security industry. Their management team is considering an acquisition of Under Wraps Company, their largest competitor. Before proceeding with the acquisition attempt, Safe-and-Secure's board of directors is requesting an audit of Under Wraps' books and records. Your audit firm has been engaged to perform the audit and due diligence. Specifically, the board of directors requests that you examine the owner's family and roles in the company.

Under Wraps Company

Under Wraps is a large, local home security business that has been in the area for a long time. It has held a large market share for several years and has received many referrals from present users of its home security systems. It owns five large properties in the area from which it performs business and is an optimal takeover target. Below is some additional information on Under Wraps.

Internal Environment

Management style:The owner of the business, Jeff Johnson, has taken a hands-off approach to managing his business. He frequently takes extended vacations with his family and rarely examines the books of his business. He is happy with his level of income and is not concerned with the future, believing that his company will always be profitable.

Executives:Several of the owner's relatives hold high positions in the company. The owner's brother, Chucky "Gambling Genius" Johnson, is the chief accountant and answers only to his brother, Jeff. He is majority owner of a local amateur sports team, which has struggled to sell tickets and is facing bankruptcy.

Employees:The company takes advantage of the cheap labor at the large, local university. Each summer, it hires hundreds of students to sell its products door to door. Successful students from previous years train the new students, and expectations and motivations are high. The temporary labor force is paid sub-minimum wage but can earn significant commissions on sales. Last year, some of the students earned over $80,000 in commissions in just four months of summer sales, with some receiving quota rewards such as cruises and new cars.

Internal controls.In order to facilitate quicker purchases and obtain deals from vendors, Jeff has left Chucky a stack of blank, presigned checks. Anyone in the purchasing department has access to these checks and can use them as needed.

Questions

1. As the auditor, briefly explaintwoconcerns you have that may suggest fraud is occurring in Under Wraps. [4 POINTS, 2 - 3 sentences per concern]
2. What controls and changes would you suggest that Under Wraps put in place to prevent potential fraud from occurring for each of thetwoconcerns you listed in part (1)? [4 POINTS, 2 - 3 sentences per control]