Question

Natalie is struggling to keep up with the recording of her accounting transactions. She is spending a lot of time marketing and selling mixers and giving her cookie classes. Her friend John is an accounting student who runs his own accounting service. He has asked Natalie if she would like to have him do her accounting. John and Natalie meet and discuss her business. John suggests that he do the following for Natalie.

1. Hold cash until there is enough to be deposited. (He would keep the cash locked up in his vehicle). He would also take all of the deposits to the bank at least twice a month.
2. Write and sign all of the checks.
3. Record all of the deposits in the accounting records.
4. Record all of the checks in the accounting records.
5. Prepare the monthly bank reconciliation.
6. Transfer all of Natalie’s manual accounting records to his computer accounting program. John maintains all of the accounting information that he keeps for his clients on his laptop computer.
7. Prepare monthly financial statements for Natalie to review.
8. Write himself a check every month for the work he has done for Natalie.
Instructions:
Identify the weaknesses in internal control that you see in the system John is recommending. Can you suggest any improvements if Natalie hires John to do the accounting?

Answer 1

1. Hold cash until there is enough to be deposited. (He would keep the cash locked up in his vehicle). He would also take all of the deposits to the bank at least twice a month.

This is a very weak spot in internal control. John can easily steal Natalie's money, if not all, at least a part of it. Cash must be handled very carefully, and my advice would be that Natalie herself deposits the money. Remember that John will make all the accounting records and journal entries, and if no one controls him, bad things can happen.

2. Write and sign all of the checks.

It is Natalie's account and business, not John's. He cannot be in charge of doing the accounting and then collecting and paying if it is someone else's money. Again this is an invitation to theft and other crimes.

8. Write himself a check every month for the work he has done for Natalie.

Again John acts as if he owned the business and the money. This is unacceptable because john could pay himself as much as he wanted. Natalie must be the only person in charge of the deposits and writing the checks.