From: The Alchemy Inc. External Audit Team
Date: September 23, 2008
Re: Internal Control Weaknesses Leave Alchemy Inc. Vulnerable to Errors, Fraud, and Abuse
Internal controls represent an organization’s processes and procedures used to meet its goals and objectives and serve as a defense in safeguarding assets and preventing and detecting errors, fraud, and abuse. Effective internal controls provide reasonable assurance that an organization’s objectives are achieved through (1) reliable financial reporting, (2) compliance with laws and regulations, and (3) effective and efficient operations. The passing of the Sarbanes-Oxley Act of 2002, as well as the numerous corporate frauds and bankruptcies over the past decade—including some…show more content… Material Weakness: Ineffective Functioning and Oversight of the Internal Audit Department
The team found Alchemy Inc.’s internal audit department to be largely ineffective due to the weaknesses in managing the department, the experience of the department’s personnel, and the department’s oversight and monitoring across the company. Currently, the internal audit department is under the direction and supervision of the CEO, not the audit committee as best practices dictate. Further, the internal auditor and his staff do not have the appropriate level of experience and qualifications needed to design and apply effective control procedures. For example, the team questions the validity of the CPA license one employee was able to obtain in only two days over the internet. In addition, the department does not perform any periodic oversight of processes across the company, monitoring to see if the controls are in place and functional. For example, the receiving clerk said that in his two years at the company, the receiving process has never been reviewed by the internal audit staff.
• Potential for misstatement & fraud: A serious conflict of interest can occur not only when an internal audit department is directly supervised by management, but also when
