Hanna Co Sells Art Supplies and Also Has a Custom Framing

question 57

Essay

Hanna Co. sells art supplies and also has a custom framing department. Only two employees are trained to complete custom framing orders. They place the orders for the supplies they need. Also they are the only ones who take customer orders, as the ordering process is fairly technical. For the past several years, custom framing has been a very profitable part of Hanna Co.'s business. However, the financial reports for the most recent period show a substantial drop in profitability for custom framing. Upon investigation, it was determined that the supplies being used in custom framing had increased measurably. However, the sales generated did not support the amount of supplies being used. Further investigation discovered that one of the custom framing specialists had arranged for a co-conspirator to bring in orders and have them filled. The co-conspirator paid for the orders in cash, but the sales were not recorded in the accounting system. The two then sold the framed art through another business. What general internal control weaknesses contributed to the fraud?