TWO MAJOR PROBLEMS ARE EMPLOYEE FRAUD AND SENSITIVE OR QUESTIONABLE PAYMENTS, SUCH AS GULF OIL COMPANY'S CONTRIBUTIONS TO THE POLITICAL PARTY OF PARK CHUNG HEE AND TO THE NIXON CAMPAIGN. THE INTERNAL CONTROL SYSTEM INVOLVES THE SELECTION OF COMPETENT, HONEST PERSONNEL AND THE CLASSICAL SEPARATION OF DUTIES; THE USE OF STEPS, CROSS-CHECKS, AND MECHANICAL AIDS TO INSURE PROPER PROCESSING; LIMITED ACCESS TO ASSETS AND CONFIRMATION OF ASSETS; AND THE DEVELOPMENT AND PRESERVATION OF THE RIGHT ATTITUDES IN EMPLOYEES. THREE GOALS OF OPERATIONAL AUDITING ARE (1) MAKE NORMAL OPERATIONS SIMPLE, (2) MAKE FRAUDULENT MANIPULATIONS DIFFICULT, AND (3) BRING OUT VARIATIONS FROM THE IDEAL. OPERATIONAL AUDITING NOW INCLUDES ELECTRONIC PROCESSING WHICH MAKES PAYING AND RECEIVING FUNDS SIMPLER AND FASTER AMONG FINANCIAL INSTITUTIONS AND BETWEEN INSTITUTIONS AND THEIR CUSTOMERS. ELECTRONIC PROCESSING SYSTEMS INCREASE THE THREAT OF UNAUTHORIZED ACCESS TO THESE SYSTEMS, RESULTING IN A BETTER CHANCE OF COMPUTER ERROR AND FRAUD. CONTINUOUS SUPERVISION AND PERIODIC AUDIT ARE ESSENTIAL. MANAGEMENT AUDITING INVOLVES THE FORECASTS OF FUNDS FLOW, THE INFLOW AND CONVERSION OF LIQUID ASSETS TO CASH, AND A COMMITMENT TO PRODUCTION NEEDS. CASH DESERVES DIRECT ATTENTION FROM BOTH SENIOR MANAGEMENT AND DIRECTORS. (JLF)