Question

Question 1: Grand Flower Shop is in downtown Sunnyville. Greg, the owner of the shop is not on site each day and wants to make sure that the appropriate controls over cash were in place and has hired you to review the shop’s current processes and provide recommendations for improving controls. Currently, the shop employees 5 individuals consisting of 3 florists, 1 delivery driver and one office employee. 

1. Grand Flower Shop currently only accepts cash, no debit or credit cards are accepted

2. The florists each ring in their own sales at the only cash register. 

3. Hannah, the office employee, reconciles the bank and prepares deposits. In addition, she covers for the florists during their lunch and breaks by ringing in the cash sales at the cash register. 

4. Reid, the delivery driver, on occasion accepts cash from customers for orders. Reid does not have a receipt book. 

5. Mitch, the head florist, orders all the supplies, approves the invoices and signs the cheques to pay the vendors. 

6. Chanelle, also a florist, does the daily deposit to the local bank, but if the week is busy, sometimes, the deposits aren’t completed for several days. 

7. Carson was recently hired as a florist. When hired the owner decided not to check his references or do any criminal checks because Carson seemed like a nice person. 

8. All employees have access to the store safe and know its combination. 

9. Grand Floral Shop has no documentation on their current processes. 

Required: Provide a report to Greg, detailing the weaknesses in internal controls and the changes to controls you would recommend.

Answer 1

To,

Mr. Greg

XXXXXXXXXXXXXXXXX

Dated: November 15, 2020

Dear Mr. Greg,

As per your instructions, I have reviewed the shop's current processes and internal control system. I was surprised to learn that the Grand Folowers Shop's current processes are not documented at all at present. Hence, First of all, I would suggest that whatever internal controls I suggest in this report should be well documented and made available to the employees so that they can follow them meticulously. Now, my detaled report is as below:

1. Accepting only cash for the transactions involves certain risks as the cash can be stolen or pilfered by the employees. Hence. I suggest that you should install the card swiping machines of one or two of reputed card companies. This will result in a better tracking of the sales and will lower the risk of loss of cash.

2. Another weakness of the internal controls of the shop is that the job of ringing the sales is done by almost every one of the florists, and even the office clerk during lunch hours. This makes it impossible to fix responsibility for cash shortages at the sales counter. This weakness of the internal controls must be addressed by assigning the role of ringing the sales to only one employee, with another employee as a backup for the lunch hours. The employee leaving for lunch should leave the counter only after closing the cash for sales ringed by her.

3. The office employee reconciles the bank statement and also prepares the deposits which is a sure recipe for the risk of fraud. This duty should be segregated immediately to have a better internal control over the deposit of sales.

4. The delivery driver accepts cash without issuing receipts which is a big weakness of the internal controls of the shop. It means that the shop is at the mercy of the delivery driver for depositing cash he accepted. This weakness creates a risk of pilferage of cash. The Shop should give printed Receipt Book with duplicate carbon copies to be kept as record which can be referred to for accounting for the cash collected by the delivery driver.

5. The Head Florist approves the invoices and also signs the checks. This duty should be segregated to have a better internal control over the cash at the bank. The Head Florist must approve the invoices but the job of signing the checks must be given to some other employee who should issue the checks after carefully examining the invoices for errors and inaccuracies.

6. Chanelle, the florist is not preparing the deposits everyday which exposes the business to the risk of cash loss. It is a big weakness of the internal controls of the shop. Preparing deposits should be formally made a part of her duties so that she can be held responsible for the delays or omission in depositing the cash.

7. The Shop is not at all following the "Know Your Employee" policy. I have observed that no criminal checks or checking of references was made at the time of hiring Mr. Carson, the new florist. This is a strong weakness of the internal control system at the shop which can expose the business to the risk of frauds and theft. An SOP should be documented, framing the rules of "Know Your Employee" policy to be followed at the time of hiring the new employees.

8. One sure thing that can put a business to loss of cash is when everyone has the combination of the safe. This big weakness of the internal controls needs be immediately addressed. Only the employee who is given the duty of preparing the deposits everyday should have the combination of the safe.

I am sure that if the above suggestions of mine are well documented and implemented by you at Grand Folowers Shop, the weakness of the internal control system in the Shop's current processes can be removed. Needless to add that since you do not visit the Shop everyday, I cannot stress more the need for your strengthening the internal control system at the Shop so that your business is not exposed to the risks of theft, pilferage, or frauds.

Yours Sincerely

XXXXXXXXXX