Problem:
Simon Blfpstk Construction Company has two divisions. The president (Simon) manages the roofing division. Simon delegated authority and responsibility for management of the modular manufacturing division to John Gault. The company has a competent accounting staff and a full-time internal auditor. Unlike Simon's procedures, however, Gault and his secretary handle all bids for manufacturing jobs, purchase all materials without competitive bids, control the physical inventory of materials, contract for shipping by truck, supervise the construction activity, bull the customer when the job is finished, approve all bid changes, and collect the payment form the customer. With Simon's tacit approval, Gault has asked the internal auditor not to interfere with his busy schedule.
Discuss the situation in terms of internal control and identify fraud that could occur.