An audit report of the Patpat merchandise company contains the following observations:

a. A client fails to discover employee fraud of $50,000 on a timely basis because bank accounts are not reconciled monthly.

b. Cash is more susceptible to theft than an inventory of coal. A cash receipt of $20,000 that has been delayed for 15 days due to the accountant’s self-argument that it needed to be reconfirmed from the buyer due to a mismatch in discount. The auditor found that confirmation of receivables fails to detect a material misstatement.

c. Disbursements of $100,000 have occurred without proper approval and there is inadequate segregation of duties in the payable process.

d. Management has not taken corrective action to resolve past engagement observations related to inventory controls. The estimation for the loss on financial statement is $250,000.

e. Separation of duties is not proper in the supplier payments process. The estimation for the loss on financial statements is $50,000.

Required:

Please prepare the report (5Cs report) including:

2.1. Which two of these observations are most likely to indicate the existence of control weaknesses? For each observation, explain the reason why you choose or not choose that observation (What is the problem/ issue? What is happening?)

2.2. Why did the condition happen?

2.3. How do we, as auditors, know this is a problem? Which of the appropriate manual audit procedures could be conducted to gather the necessary evidence to support the findings (d) and (e)? (Note: please explain clearly the objective of each audit procedure)

2.4. Using the above matters independently, determine which could have an insignificant, significant and material effect on the financial statements. Knowing that the internal auditor determines that the insignificant effects on the financial statements are less than $10,000 and more than $20,000 are material. What is the impact? Determine whether problems are caused by improper control design or ineffective controls (or both). Please explain why?

2.5. In each of the above matters, what recommendation should the auditor make? Please explain why?