NEW PHONE INC.

New Phone Inc.

New Phone Inc

Introduction

This paper identifies and evaluates the strengths and weaknesses of New Phone Inc.'s control environment from the given case study. Further, auditor's internal control opinion report based upon the New Phone Inc.'s internal controls is discusses. This paper also discusses the factors New Phone Inc.'s control environment that have led to and facilitated Smith's manipulation of inventory. Finally, various controls are examined that should be put in place to strengthen New Phone Inc.'s control environment.

In this context, where companies face an increasingly competitive environment, more challenging and with a society more concerned with economic activity, internal audit faces a wide horizon with few possibilities for action. In this sense, the field of quality in all its dimensions is a field in which internal audit can offer the company a valuable contribution in their management.

Discussion

Strengths and Weaknesses of New Phone Inc.'S Control Environment

Strengths

1.New Phone Inc. is a diversified manufacturer of various products, thus if any loss is incurred in any product line, it can easily be covered by other product sales.

2.It has a huge market share as it is operated throughout in the market of United States and Costa Rica.

3.One of the other strength of the company is that Human resource of the company is competent.

Weaknesses

1.Although employees are competent but they are aggressive, which means employees do not minimize the risk, rather they take huge risks as they are risk takers. So in future it may harm the company.

2.Board of Directors and audit committee are inactive and do not monitor the operations of the company.

3.No internal audit; so employee package based on performance can be manipulated easily to raise their compensation.

4.Code of conduct exists but no employee follows and no one is monitoring if employees are working according to the compliance.

5.Smith Cheryl's compensation was based on the division profitability, so in order to earn higher profit she started cutting down the cost aggressively by reducing control activities over inventory. Also she employed FIFO method so her division's cost of goods sold was decreased because assuming there is an inflationary trend in the market, the raw material purchased at back date at a lower cost is sold at a higher price today in order to earn higher profit.

Auditor's opinion report based upon the New Phone Inc.'s internal controls

1.There is no check and balance, no restriction and no monitoring.

2.The Board of Directors do not consider themselves accountable because they are inactive and performing inefficiently.

3. Employees are not following the code of conduct, it is just a mere a pile of papers.

4.The control activities have been reduced over the inventory by Smith.

Factors That Have Led to and Facilitated Smith's Manipulation of Inventory

1.Compensation plan

In New Phone Inc. the compensation plan was designed in a way that manager of Intercept Division, Smith's compensation and bonuses depends highly on the profitability of her division. Similarly, other employees' compensation also depends on their performance.

2.Competitor's Threat

Since Smith was the manager of the Division, company has been increasing ...