Reference no: EM1312045
Find the controls and weaknesses in the controls, Misappropriation of funds, Audit procedures and to test the control system.
The Fin Company, a major manufacturer and distributor of agricultural products, outsources their benefits administration to a large actuarial firm. One of the functions that the outsourcing firm provides to the company is an automated benefit payment system. This system collects information from their forty-five locations to determine the payments required for each of the company\'s benefit providers. The system processes about four million dollars of transactions each month. The process is described below.
The benefits administrator receives automated feeds from all forty-five locations concerning the people eligible for benefits. From this information the benefits administrator identifies new participants and participant terminations and any changes in the benefit coverage for each participant. This information is then matched to the payroll deduction records for each participant to determine the completeness and accuracy of the information provided. Exceptions from this comparison are forwarded to the company for correction and resubmission.
The information generated is then reformatted and sent to the benefit providers in order that they know who is covered in each benefit plan. The benefits administrator also calculates the cost of each participant\'s benefits summarizes that information by benefit provider (usually an insurance company) and forwards that summary information to Fin Company.
The benefits manager at Fin Company reviews the invoices for reasonableness based on the gross data that is provided with the invoice. Upon completion of her review, she forwards the information to the vice president of human resources for final approval. Upon the VPs approval, she forwards the bill to treasury where a payment clerk prepares vouchers for payment of the benefit provider\'s statements.
An assistant treasurer examines the vouchers and the underlying bills provided by the benefits administrator and approve them for payment. A treasury clerk then prepares wire transfer authorizations for the approved amounts and wires the money to the benefit providers. All wire transfers are reviewed by the treasurer daily to assure they were properly authorized and the funds were transferred to the correct location.
Last Monday and Tuesday, the treasurer attended a two day meeting of the Federated Association of Reallysmart Treasurers. On Tuesday, the treasury clerk processed the wire transfers but failed to return from lunch. He later called and said that he was not feeling well and would return to work in a day or two. On Wednesday, the Treasurer returned and found that three million dollars was wired to Brazil rather than to three of the benefits providers. On Friday, the treasurer got a post card from the treasury clerk. The post card was postmarked Rio de Janeiro. It just said that the mie thais were good.
Required:
Identify the controls that minimized the probability of the misappropriation of funds and weaknesses in the controls that allowed this theft to occur. Note that the description of those controls and how they should function is the key to the answer and not simply segregation of duties or other such general statements.
Identify the audit procedures that would be used to test the control system that could have detected this problem if they had been performed. Note that a laundry list of tests of controls of the payment cycle will get you little, the actual tests that would have identified this problem is the key to success here.