This case is based on an actual situation. Centennial Construction Company, head
ID: 2449666 • Letter: T
Question
This case is based on an actual situation. Centennial Construction Company, headquartered in Dallas, Texas, built a Rodeway Motel 35 miles north of Dallas. The construction foreman, whose name was Slim Chance, hired the 40 workers needed to complete the project. Slim had the construction workers fill out the necessary tax forms, and he sent their documents to the home office. Work on the motel began on April 1 and ended September 1. Each week, Slim filled out a time card of hours worked by each employee during the week. Slim faxed the time sheets to the home office, which prepared the payroll checks on Friday morning. Slim drove to the home office on Friday, picked up the payroll checks, and returned to the construction site. At 5 PM on Friday, Slim distributed payroll checks to the workers.
Requirements
1. Describe in detail the main internal control weakness in this situation. Specify what negative result(s) could occur because of the internal control weakness.
2. Describe what you would do to correct the internal control weakness.
Explanation / Answer
1.
The main internal control weakness in the above case is that there is only one person i.e. Construction foreman , Slim Chance who is looking after all the work related to construction of Roadway Motel. These is one of the major weakness in internal control since there is no control on whether the foreman is doing all the work properly or not, whether he is engaged in any sort of fraud or he is making any mistake.In these case Slim chance had hired the workers, had them filled the necesarry forms, filled out there time cards, faxed it to the office, picked the payroll checks, distributed it to workers. Since all of these work is done by Slim chance and there is no other person supervising his job there is hogh possibility of any mistake or fraud that can be done by slim chance.
Negative results that could occur:
a. Slim chance had hired 40 workers but there is no proof/supervision that in reality 40 workers are hired he could have hired less worker and told the company that 40 workers are hired and take the payroll checks for all 40 workers
b.Time card of workers is filled by Slim thus there is no control whether correct timings are recorded or not. Since extra hours can be recorded which are not worked and extra payment can be taken by Slim since payroll cheques are collected and distributed by him only.
2.
Steps to correct weakness in internal control
1. Maker checker principal - There should be one person doing the job and another person checking the job done by that person. These reduces the chance of any mistake or any fraud on the company
2. Collect proper documents in relation to identity proof of worker and send it to the home office
3. Suprise verification by company official: There should be suprise verification done by any trustworthy company official on a regular interval say one time a week to see whether construction work is going on properly whether attendance recorded of workers matches with actual workers present, time card is filled only at the day end
4. Signature of workers on time card: On time card signature must be taken of every worker authenticating the work done by them
5. Distribution of cheque by company official: The payroll cheques must be distributed by a trustworthy company official rather than Slim Chance