Chapter 4 solutions

Chapter 4 solutions - Problem 2 Reading review problem a....

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Problem 2 Reading review problem a. What does it mean to say that WorldCom lacked “adequate internal controls ?” Internal control has four basic purposes: safeguarding assets, ensuring reliable financial reporting, encouraging compliance with management directives and promoting operating efficiency. Saying that WorldCom lacked adequate internal controls means that they failed to fulfill one or more of those four purposes. b. How does the risk described in the article relate to Brown’s taxonomy of risk ? WorldCom has experienced legal and regulatory risk; as a result of their lack of adequate internal controls, the organization is incurring a penalty— withdrawal of government contracts. Exposure to legal and regulatory risk may lead to other risk exposures, such as liquidity risk. c. What internal controls may have helped WorldCom to avoid its bankruptcy and / or the problem described in the article ? Stronger transaction authorization systems would probably have helped WorldCom. In addition, a strong internal audit function would probably have revealed some of the problems before they became too serious
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Problem 3 Making choices and exercising judgment a. Consider the four vignettes presented in the last section of the chapter. For each one, suggest one additional internal control procedure.
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Chapter 4 solutions - Problem 2 Reading review problem a....

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