Question

Fork Company is a rapidly growing start-up business. The bookkeeper, who was hired ten months ago, left Hong Kong after the company's manager discovered that a large sum of money had disappeared over the past two months. An audit discovered that the bookkeeper had written and signed several checks made payable to his girlfriend and then recorded the checks as salaries expense. The girlfriend, who cashed the checks had never worked for the company, left Hong Kong with the bookkeeper. As a result, the company incurred an uninsured loss of $110,000.

Required: Discuss which principles of internal control appear to have been ignored for the Fork Company

Answer 1

The principle of internal control ignored by Fork Company is Separation of duties.

The company incurred a loss of $110,000 as the book keeper of the company should not have been given the responsibility of writing the checks, as it gives the bookkeeper ability to alter the records and commit fraud.Separation of duties involves an internal control under which the staff is separated by their functional responsibilities in the organization .One person should not be given the only control over a transaction. Separation of duties helps to reduce frauds as well as ensure that mistakes cannot be made without being discovered by another person.Periodical reviews should be conducted by the company to detect these at earlier stages.