Question

1. (6 pts) Case 3.1, The Trolley Dodgers (to honor World Series Season)
As you may recall, much of payroll testing is done through test of controls.
a. Identify the internal control weaknesses in the Dodger’s payroll system.
b. What audit procedures might have detected the fraudulent scheme?


2. (8 pts) Case 3.7, Foamex International, Inc.
a. What responsibility do auditors have to identify internal control problems in their client’s accounting systems under current professional standards? Answer for both public and private companies. Be specific and reference those standards.
b. To whom and how should these internal control problems be communicated? Answer for both public and private companies. Be specific and reference those standards.
c. Do you believe Foamex was at fault or the SEC was making an example of them? Explain.


3. (11 pts) Case 1.14 Navistar International Corporation
a. Discuss the similarities and differences between management’s and the external auditor’s reporting responsibilities on internal control of public companies.
b. Explain the difference between a ‘significant deficiency” and “material weakness” in internal control. Give an example of each.
c. Exhibit 1 lists the 15 material weaknesses in internal controls over financial reporting that were reported in Navistar’s 2005 10-K. Pick the top five that you believe were the most problematic and explain why.
d. Is it possible for a company with such poor internal controls to be audited? Explain.


4. (5 pts) Case 3.9 Walmart de Mexico
       What internal control activities might have reduced the possibility of illegal payments to government officials if they had been in place for Walmart de Mexico and other foreign subsidiaries? Discuss the cost effectiveness.

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1. The Trolley Dodgers
(a) There are three major internal control weaknesses in the Dodger’s payroll system which allowed Campos to perpetuate the payroll fraud undetected. The first weakness is that there was no separation of duties. Campos was solely in charge of the entire payroll system, thus the company lacked a system of checks-and-balances to prevent payroll fraud.
The second weakness is that there was no data security. This was caused by the absence of security controls which meant that Campos could manipulate payroll data undetected. The third weakness is that the organization lacked a strong system of internal audit and external audit. Random and regular audit reviews would have enabled Dodger’s to detect the payroll fraud.
(b) There are various audit procedures that might have detected the fraudulent scheme. Since the scheme primarily involved fictitious employees and routine inflation of the number of hours worked, the primary strategy the organization could have used is...

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