Question

onciliation P5.5 The bookkeeper who has worked for a small hotel for more than 30 years is retiring. Because he was such a reliable employee, he was given more and more responsibility over the years and did virtually all of the work, such as keeping all the accounting records, approving invoices for pay- ment, preparing checks, and, in the absence of the hotel's owner, signing checks that needed to be sent to suppliers. His daily duties included col- lecting the cash at the end of the day from the front office and restaurant, clearing the machine tapes, counting and verifying cash against tapes, de- positing the cash in the bank, and making the necessary entries in the ho- tel's bookkeeping records. At month-end he would do the bank reconcil- iation. The hotel's owner realizes that she cannot hire and train someone to take over all the responsibilities of the retiring bookkeeper and that it would not be desirable for internal control purposes to do so. She knows that she will have to assume some of the retiring employee's duties. She is busy already, since, as well as generally managing the hotel she does all the ordering of food supplies for the restaurant and all the ordering and receiving of bar supplies. From an internal control point of view, discuss which of the retiring bookkeeper's responsibilities the owner should take over while, at the same time, minimizing the amount of time this would require. P5.6 The owner of Charlene's Restaurant believes that her food cost is higher than it should be. Charlene thinks that the problem might be in the re- ceiving area and/or the dining area because she says she has good con- trol over food in storage and production. She has asked you to see what you can determine. By observation, you notice that when drivers make

Answer 1

Internal Control is a process designed, implemented and maintained by management or those charged with governance with a view to get reasonable assurance with regard to:

- Effectiveness and efficiency of opeartions

- Reliability of financial reporting

- Safeguards to assets and

- Compliance with applicable laws and regulations.

An important characterstic of any internal control system anywhere is no one person should have all the responsibility and control of a process/transaction, simply because person in-charge in capable of manipulating things to their will, hence it is a major control deficiency. One solution to this is that there should be segregation of duties within personnel for different elements of a process such as accounting and payment, etc by also giving due considerations to the cost of control which seems to be the widely known reason for organisations not investing in an appropriate control system as sometimes a control in place doesn't justify their cost of implementation.

P5.5 Here the segregation of duties aspect is missing since the bookkeeper was a valuable and reliable employee and was given more and more responsibilities over the years and not only that but also assumed some other important functions such as approving invoices and making their payments thereon. The bookkeeper may have been a trustworthy employee with high ethical standards but this situation doesn't dispute the fact that this is a major control deficiency. Now in the event of his retirement some other perosn will have to be there for doing this work.

Since, the hotel owner's contention is right that she can't hire someone to assume all responsibilities she will have to assume some work responsibilities herself. Considering the fact that she is already busy managing the hotel, the work duties she could assume can be:

1. Approving invoices for payments

2. Signing checks for payments

3. Clearing machine tapes and counting & verifying cash against tapes

These are the activities whe she can assume and her presence in the process will transalte into a strong control for the transaction and rest other activities like bookkeeping, making checks, depositing cash in the bank, etc can be delegated to the new hire.

P5.6 The problems in the current procedures in the receiving area are:

1. Drivers obtaining signatures from any employee who happens to be near the dock,

2. Leaving deliveries at the receiving dock until they are moved to storage units and not maintaining a GRN register (goods received note) and store receiving records,

3. No proper documentaion of invoices,

These problems are creating abnormal losses beyond normal losses. The possible solutions to these problems are:

1. Drivers obtaining signatures from only authorized personnel responsible for this task

2. As and when deliveries are received there is a quantity inspection at the receiving dock by matching the quantities received with the quantities ordered by giving due considertions to spoilage on account of normal losses and therby issuing a "goods received note" also the deliveries should be immediately moved to the storage units and also accounting for actual quantities enterd in the store records against the GRN.

3. Proper invoice documentation is required either by having physical copies of the invoices delivered to the authorized personnel in full by the drivers or the supplier can mail all the invoices later.

These activities will substantially help in maintaining control over food cost by keeping in check the abnormal losses.

The problems in the current procedures in the dining area are:

1. Servers using scratch pads instead of printed sales checks to record customer's orders, this may lead to revenue leakage by misappropration of cash against the sales made,

2. Servers telling cooks to prepare what they need instead of issuing a copy of items for customer's orders,

3. No proper billing system in place and instead servers jotting down the amounts, receiving cash and placing it in the cash box, without entering the sales in the cash register.

The possible solutions to these problems are:

1. Servers should be using printed sales checks for the items ordered by the customer,

2. For every order received the server will provide a copy of printed sales checks to the cook and he'll prepare and issue only those items as required by the customer, this will set accountability on the cook for the items prepared and issued by him,

3. There should be a proper electronic billing system with a person in charge who will recieve the original printed sales checks by the server and prepare a printed bill which will then be issued to the customer and payment will be received against it by the server who will hand it over to the billing counter and person in charge of billing will make a record of this sale in the cash register,

4. At the end of the day compliling all the duplicate invoices for the sales made during the day and verifying the cash received against them.