The SB Construction Company has two divisions. The president, Su, manages the roofing division. Su has delegated authority and responsibility for management of the modular manufacturing division to Jon Gee. The company has a competent accounting staff and a full-time internal auditor. Unlike Su, however, Gee and his secretary handle all the bids for manufacturing jobs, purchase all the materials without competitive bids, control the physical inventory of materials, contract for shipping, supervise the construction work, bill the customers, approve all bid changes, and collect the payment from customers. With Su’s tacit approval, Gee has asked the internal auditor not to interfere with his busy schedule.

Required:

a. Discuss the internal control in this fact situation and identify fraud risks that could arise.

b. Assume you are the independent external auditor of SB. Explain your responsibilities to report on this situation to SB’s management and board of directors.