Question

explain clearly

CP 8-6 Internal controls The following is an excerpt from a conversation between two salesclerks, Jean Moen and Sara Cheney, Jean and Sara are employed by Turpin Meadows Electronics, a locally owned and operated electronics retail store. Jean: Did you hear the news? Sara: What news? Jean: Neal and Linda were both arrested this morning, Sara: What? Arrested? You're putting me on! Jean: No, really! The police arrested them first thing this morning. Put them in handcuffs, read them their rights- the whole works. It was unreal! Sara: What did they do?

Answer 1

Systematic measures (such as reviews, checks and balances, methods and procedures) instituted by an organization to (1) conduct its business in an orderly and efficient manner, (2) safeguard its assets and resources, (3) deter and detect errors, fraud, and theft, (4) ensure accuracy and completeness of its accounting data, (5) produce reliable and timely financial and management information, and (6) ensure adherence to its policies and plans.

In this case, the fraud committed by Neal and Linda could have been prevented through the following 4-step simple control mechanisms -

1) Proper maintenance and audit of customer database to stop inclusion of fictitious customer records. Customer data records should be ideally created by sales or operation analysts and approved by senior manager. Cashier or Billing executives can have read only access to customer database but not creation or updation access. This will stop creation of fake customer accounts.

2) Merchandise refund should be entered into the system using proper refund reason code and approved by a senior manager. This will help detect product or service deficit and ensure vaild refunds.

3) Valid refunds should be credited into bank accounts of customers directly. Cash refunds should be avioded as much as possible. This will help minimising embezzlement of cash.

4) Balance confirmation should be done periodically with customers. This will prevent any misappropriation or incorrect accounting.

Further, liquid assets always need to be protected more than illiquid assets because they are more easily stolen. Cash is the most liquid asset and can be pretty easily stolen by any employee who handles it. Special internal controls are put in place to protect company cash.

a) The segregation of duties control is often used for cash. This control requires that the person who receives the cash from the customer and the person who records the cash receipt in the accounting system are never the same employee. In fact, some internal control systems take it a step further and require a different employee to collect the cash, deposit it in the bank, and record it in the accounting system.By segregating the duties of each employee, no single person can collect the cash, deposit it, and record the sale. This prevents fraud because one person can’t pocket some of the cash and just record less cash receipts in the accounting system.

b) Internal Check is an integral function of the internal control system. It is an arrangement of duties of the staff members in such a way that the work performed by one person is automatically and independently checked by the other. Segregation and/or rotation of duties, along with frequent surprise audits of cash on hand, independent reconciliation of register contents and tapes, and voucher accounting are the prime modes of embezzlement prevention. One individual must not have the sole responsibility for receiving cash, counting it and reconciling registers, preparing and making bank deposits, doing the voucher accounting, and posting payments to open receivable accounts.

• Responsibility − Allocation of business work among the various staff members should be done in such a way that their duties and responsibilities should be judiciously and clearly divided.

• Automatic check − Automatic checking of work of one employee by another forms part of a good Internal Check system.

• Rotation − Transfer or rotation of employees from one seat to another must be followed under good system of internal control.

• Supervision − Prescribed procedures and Internal Check should be strictly supervised.

• Safeguard − To safeguard files, securities, cheque books is also recommended in Internal Check.

• Formal Sanction − Without formal sanction, no deviation should be allowed from the established procedures.

• Reliance − Under good system, too much reliability on one employee should not be there.

• Review − From time to time, system of Internal Check should be reviewed to introduce improvement.