Words Model Constructions Got A Contract To Complete A House

400 Words model Constructions Got A Contract To Complete a Housing Proj

Model Constructions has secured a contract to complete a housing project in Atlanta, GA. The foreman, Clint Harper, hired 20 workers directly to execute the project. To minimize costs, the company chose not to employ support staff for Clint. Instead, Clint was responsible for handling all necessary tax documentation, including W-4 forms and social security information, and submitting these to the company's head office in Buckhead, GA. Weekly, Clint collected time tickets from his workers, signed them, and delivered them to the head office. On Fridays, he retrieved payroll checks from the office and distributed them to the workers.

As a CPA auditing and preparing financial statements for Model Constructions, you observe this arrangement during your routine review at the head office. You meet with the owner, Mr. Lee, to discuss the internal control weaknesses inherent in this setup, potential impacts on the business, and corrective measures. You also briefly address the relevance of the Sarbanes-Oxley Act (SOX) concerning accounting practices for current and noncurrent assets.

Paper For Above instruction

The described setup presents significant internal control weaknesses that could adversely impact Model Constructions' operational integrity and financial reporting accuracy. These weaknesses include a lack of segregation of duties, inadequate oversight, and insufficient documentation controls, all of which increase the risk of fraud, errors, and misappropriation.

Firstly, Clint Harper, as the sole person responsible for collecting time tickets, signing them, retrieving payroll checks, and distributing wages, embodies a lack of segregation of duties. This concentration of responsibilities creates an environment conducive to fraudulent activities, such as misappropriating funds or manipulating timesheets without detection. Without independent reviews or reconciliations, errors or fraudulent acts may go unnoticed, leading to financial misstatements and potential compliance violations.

Secondly, the absence of documented internal controls and formal oversight mechanisms weakens accountability. For instance, relying solely on Clint to maintain payroll records and deliver tax forms to headquarters may result in incomplete or inaccurate documentation, increasing error risk. Furthermore, the process of collecting and distributing checks is vulnerable to misappropriation if not properly monitored or recorded, especially without proper oversight from a separate personnel or an automated system.

Thirdly, these weaknesses could lead to broader compliance risks, including violations of employment tax laws and failure to meet regulatory reporting requirements. The potential for unrecorded or unreported liabilities could distort financial statements, leading to inaccurate representations of the company’s financial position, affecting stakeholders' decision-making and risking penalties from regulatory authorities.

To rectify these issues, Model Constructions should implement robust internal controls. These include segregating duties so no single employee handles multiple key functions—such as payroll processing, check distribution, and recordkeeping. The company should introduce independent reconciliation procedures, where a supervisor reviews timesheets and payroll transactions for accuracy. Automating payroll processing and tax form submission can reduce manual errors and deter fraudulent activities.

Additionally, maintaining comprehensive documentation with audit trails is essential. Periodic audits should be conducted by independent personnel to verify the accuracy of payroll and tax records, ensuring compliance and financial integrity. Training managers and staff on internal control procedures and fraud prevention fosters a control-conscious culture.

Regarding the Sarbanes-Oxley Act (SOX), it establishes strict requirements for internal controls in publicly traded companies, emphasizing transparency and accountability over financial reporting. While SOX primarily applies to public companies, its principles underscore the importance of safeguarding assets, maintaining accurate records, and preventing fraud—practices vital for all organizations, regardless of size. For current and noncurrent assets, SOX mandates robust internal control frameworks to ensure valuation accuracy, proper recording, and disclosures, reducing the risk of misstatement and enhancing investor confidence.

References

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• Sarbanes-Oxley Act of 2002, Pub.L. 107–204, 116 Stat. 745.
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