$($a$)$

An audit conducted while the note was outstanding should have disclosed the

understatement of liabilities by confirming outstanding notes payable to the holders. If a

duplicate copy of the note was on file, comparisons of this document with the ledger

account may have revealed a discrepancy.

$($b$)$

An audit after payment of the note might have disclosed the fraud by $(1)$ discovery that

the balance of the accounts payable control account was $$20,000$ less than the accounts

payable subsidiary ledger or $(2)$ comparison of vendors' monthly statements with entries

in the client's accounts.

$($c$)$

The basic weakness in internal control in Griffin Equipment Company is the

concentration of all accounting and financial matters in the hands of one employee.

Hopkins has custody of cash, is in charge of accounting records, and is solely responsible

for all phases of many transactions. Under this organizational setup, no single control or

group of procedures can overcome the basic weakness. Cash handling and recordkeeping

must be segregated if internal control is to be adequate. Two or more employees must

participate in every transaction. Barton should accept the necessity of taking an active

part in the financial management of the business.

Two specific suggestions are also appropriate. When an employee prepares notes

or checks for the signature of an executive, the executive should mail the note or check

after signing it; under no circumstances should these instruments be returned to the

employee who prepared them. Secondly, Barton should arrange for regular audits by a

firm of independent CPAs and should also ask the public accountants to make a study of

the company's financial and accounting operations to outline satisfactory internal control.

Initially, Barton may feel that he cannot afford such services, but he cannot afford to be

without them.