Question

The Toronto Tour Company (TTC) organizes tours of scenic and historic places of interest for visitors to Toronto, Ontario. On January 1, 2018, Linda incorporated TTC as a private corporation. TTC has a December 31 year end and uses ASPE.

Additional Information

• Linda manages all the business activities including entering all information into QuickBooks™ Online. She finds this works well although, with the business getting busier, she is no longer able to keep up on a daily basis. She feels that, moving forward, she will be able to update the accounting records once a month only.
• Linda uses either the business credit card or e-transfers to pay invoices.
• Due to how busy it is Linda no longer has time to make a cash deposit on a daily basis. Instead, she keeps the cash locked in her desk and makes deposits weekly, every Monday morning, after the weekend.
• Linda has been using QuickBooks™ Online to complete a bank reconciliation on a monthly basis.
• Because Linda has not been able to keep up with all the business transactions on a daily basis, she missed an opportunity to receive a discount on bus rental fees. Unfortunately, she sent in her payment after the discount period was over.
• Customers often pay cash at the start of the tour. Linda finds that, often, at the end of the day, she is carrying between $500 and $1,000 cash in her backpack. She makes sure she stops at the office to lock the cash in her desk before going home.

1. Outline 2 internal control weaknesses. Include an explanation of what can go wrong as a result of each weakness, and make recommendations on changes Linda can make to improve her internal controls in the future.

Answer 1

Answer: The Toronto Tour Company (TTC) organizes tours of scenic and historic places of interest for visitors to Toronto, Ontario. On January 1, 2018, Linda incorporated TTC as a private corporation. TTC has a December 31 year end and uses ASPE.

internal control weaknesses :

1. Inadequate documentation / records
Documentation provides evidence of the underlying transactions. It is the input to establishing proper financial records.   Financial documents should be pre-numbered to ensure all transactions are recorded and accounted for. This will help to prevent recording of the same transaction twice, as there should not be any duplicate numbers in your system.  

2. Key business cycles not properly defined
Managers and owners don’t see the need to create written policies and procedures or just even basic flowcharts defining the key business processes, as some small business processes appear to be uncomplicated. This, however, is probably one of the most unused control tools where the most value can be added with little effort. An effective procedure can align business objectives and help establish best practice operating procedures. As businesses have different focus areas, different cycles will be important to your business but for most businesses, the following processes will be critical. Sales and Accounts Receivable, Cash Management, Banking Procedures, Purchases, and Accounts Payable.

3. Lack of control with the authorization of transactions
Authorization of purchases should occur before the commitment of resources. Depending on the size of the business, levels of authority can be introduced to better eliminate the risk of inappropriate spending. For example, with orders above a certain dollar value, say $1,000, more than one quotation should be obtained which could ultimately reduce your overall expenditure. Authorizing of transactions before placing orders provides the owners/managers with the opportunity to evaluate different purchasing options, and make sure items or services obtained will support the business objectives.

4. No oversight and review
Small business owners many times get so involved in the day to day operations of the business that they tend to neglect performing basic review procedures. Business owners should take some time and interest in financial records. This is an important aspect of fraud prevention. Not a lot of time is required to review monthly revenues, expenditure reports, inventory reports, budget vs. actual amounts, and variance reports.

Solutions:

a fluid set of tools which evolve over time as the business, technology and fraud environment changes in response to competition, industry practices, legislation, regulation and current economic conditions.

While no company, even with the strongest internal controls, is immune from fraud, strengthening internal control policies, processes and procedures definitely make companies a less attractive target to both internal and external criminals seeking to exploit internal control weaknesses.

Audit interaction

The first part of strengthening internal controls involves changing the attitude some employees have towards auditors. While it is easy to view auditors as the police department's "Internal Affairs" group—whose sole responsibility it is to ferret out wrongdoing—identifying employees who are breaking the rules, personal and professional success is to be had by viewing auditors as key partners and allies in the battle against fraud.

To manage the process effectively, individual departments work together in an interactive manner. Working together increases issue awareness, strengthens communication, reduces the opportunity for fraud and ensures a more comprehensive and robust internal control process.