Question

Below are descriptions of internal control problems. Identify the one best internal control principle that is related to the problem described. 1. The same person opens incoming mail and posts the accounts receivable subsidiary ledger. 2. Three people handle cash sales from the same cash register drawer. 3. A clothing store is experiencing a high level of inventory shortages because people try on clothing and walk out of the store without paying for the merchandise. 4. The person who is authorized to sign checks approves purchase orders for payment. 5. Some cash payments are not recorded because checks are not prenumbered. 6. Cash shortages are not discovered because there are no daily cash counts by supervisors. 7. The treasurer of the company has not taken a vacation for over 20 years.

Answer 1

Internal control problems highlight failures in segregation of duties, physical controls, control activities, authorization and approval, documentation procedures, independent internal verification, and hiring practices. Instituting proper controls and enforcing policies can mitigate these risks and address false accusations of theft.

Step-by-step explanation:

Each description of internal control problems corresponds to a failure in one of the five internal control principles: control environment, risk assessment, control activities, information and communication, and monitoring activities. Here's how we might address each scenario:

1. Segregation of Duties: One person opening mail and posting to the accounts receivable ledger risks errors and fraud. Duties should be separated among different employees.
2. Physical Controls: Multiple people using one cash drawer can lead to a lack of accountability for cash shortfalls. The use of individual cash drawers or registers is recommended.
3. Control Activities: Inventory shortages in a clothing store suggest inadequate control measures, such as inventory tracking and security tags. The store should improve its control activities.
4. Authorization and Approval: The same person approving purchase orders and signing checks poses a conflict of interest. These responsibilities should be divided between individuals.
5. Documentation Procedures: The lack of prenumbered checks makes it difficult to account for all transactions. Using prenumbered checks helps to prevent transactions from being missed or unrecorded.
6. Independent Internal Verification: If daily cash counts are not being performed, discrepancies may not be detected. Supervisors should carry out daily cash counts to verify cash sales accuracy.
7. Hiring and Human Resources Policies: The treasurer not taking a vacation for over 20 years could hide malfeasance. Mandatory vacations and job rotations can help uncover fraud or errors.

For an employee labeled as a thief, addressing the accusation with their manager and seeking a review of internal controls could help to identify the real cause of the cash drawer shortages, which may be due to weak controls rather than employee malfeasance. The employee could request a more thorough investigation, such as reviewing the store's video footage, having supervisors perform daily cash counts, or ensuring that segregation of duties is in place.

Answer 2

The internal control principles are:

Establishment of responsibility

Segregation of duties

Physical control devices

Documentation procedures

Independent internal verification

Human resource controls

1. The same person opens incoming mail and posts the accounts receivable subsidiary ledger. ⇒ SEGREGATION OF DUTIES.

There should be a segregation of such duties so that the chances of fraud are reduced.

2. Three people handle cash sales from the same cash register drawer. ⇒ ESTABLISHMENT OF RESPONSIBILITY.

One person should have access to the cash register drawer so as to reduce chances of fraud where one person takes cash and no one knows who. One person having access is an establishment of responsibility for that person.

3. A clothing store is experiencing a high level of inventory shortages because people try on clothing and walk out of the store without paying for the merchandise. ⇒ PHYSICAL AND IT CONTROLS.

Physical and IT controls would prevent such events from happening because the clothes would be identified before they left the store.

4. The person who is authorized to sign checks approves purchase orders for payment. ⇒ SEGREGATION OF DUTIES.

Segregation of duties ensures that this person would not make up frivolous purchase orders and then sign the checks for them.

5. Some cash payments are not recorded because checks are not prenumbered. ⇒ DOCUMENTATION PROCEDURES.

Documentation procedures ensure that records are well kept in the company to avoid such a scenario.

6. Cash shortages are not discovered because there are no daily cash counts by supervisors. ⇒ INDEPENDENT CHECKS OF PERFORMANCE.

There should be an independent check of performance in different departments especially in relation to cash to find out why cash balances are a certain way.

7. The treasurer of the company has not taken a vacation for over 20 years. ⇒ HUMANS RESOURCE CONTROLS.

Human resource controls ensure that best practices are used in human resource to promote efficiency. This scenario will lead to the burnout of the employee which would reduce efficiency in the business.