Question

The following internal control procedures are used by Red Company for cash receipts and disbursements: 

1. Cashiers receive all over-the-counter receipts and place the cash into a single cash drawer.

2. When cash in the drawer exceeds $500, it is placed in an envelope marked “cash” and stored in a drawer in the supervisor’s office.

3. The company’s accountant makes daily bank deposits.

4. The clerk in the receiving department authorizes all payments for purchases.

5. Blank cheques are kept in the main office.

6. The company’s internal auditor prepares bank reconciliations annually.

Instructions:

For each of the above procedures, explain the weakness in internal control, identify the control policy or procedure violated, and suggest a change in procedure that will result in better control.

Answer 1

1.The practice of keeping cash in a single drawer is widely followed. however, the weakness here is keeping full amount in single drawer because it increases the risk of theft and manipulation from from a single point. A better approach would be to forecast cash requirements for different departments and then cash amount should be kept separately as per requirements.

2. There could be two weakness in this case as the cash is kept in supervisor office and the envelope is marked wit CASH. A better approach would be to deposit the cash on a daily basis in bank account and the envelope containing cash should have all other details like currency denominations. etc.

3. The weakness here is that the ACCOUNTANT is responsible for cash deposit. A better approach should be assigning this task to other person from a different team as accountant has all the power to pass entries and he might manipulate the same.

4. The weakness here is person responsible for receiving purchases should not be given authorization responsibility. A better approach would be giving authorization power to someone from a accounting department.

5. Blank cheques should not be kept at main office but it should stay with authorised signatory. An alternative approach would be to keep the same at different branches as per requirements.

6. The reconciliations should be done MONTHLY, not ANNUALLY.