Question

West End Boutiques

The West Boutiques company was founded by Libbie Williams in 1990 with a single store in college station, Texas and the company now has 21 shops located in the triangle of Dallas, San Antonio, and Austin, Texas. Libbie was an accounting major in college, passed the entire CPA exam in her first attempt with high scores, and worked for one of the large CPA firms for 11 years prior to opening her first store. Based on her work experience, she fully understands the value of strong internal controls. Further, she recently selected a state-of-the art accounting system that connects all of her stores financial transactions and report.

Libbie employs two internal auditors who monitor internal controls and also search for ways to improve operational effectiveness. As part of the monitoring process, the internal auditors take turns conducting periodic reviews of the accounting records. For instance, the company takes a physical inventory at all stores once each year and an internal auditor oversees the process. Chris Domain, the most senior internal auditor, just completed a review of the accounting records and discovered several items of concern.

• Physical inventory counts varied from inventory book amounts by more than 6% at two of the stores. In both cases, physical inventory was lower.
• Two of the stores seem to have an unusually high amount of sales returns for cash.
• In 9 of the stores, gross profit has dropped significantly from the same time last year.
• At 4 of the stores, bank deposit slips did not match cash receipts.
• One of the stores had an unusual number of bounced checks. It appeared that the same employee was responsible for approving each of the bounced checks.
• In 7 of the stores, the amount of petty cash on hand did not correspond to the amount in the petty cash account.

a- Identify 6 risks that may created the problem.

b- control for each of the risks.

C-classify each of the control activities as preventive, detective, or corrective.

Answer 1

Issues	a.	b.	c.
Physical inventory counts varied from inventory book amounts by more than 6% at two of the stores. In both cases, physical inventory was lower.	Control risk, which the existing internal control system could not detect--inadequate controls in place.Indicates lacunae in the system itself.	First,adequte testing of the prevailing internal control mechanism.	Both corrective (of whatever has occurred) & preventive(for future )
Two of the stores seem to have an unusually high amount of sales returns for cash.	Inherent risk --inherent in the nature of business-due to the huge no.of shops	The auditor must foresee such mistakes & plan his audit scrutiny to suffice the level of operations--so as to form a correct audit opinion.	Preventive control
In 9 of the stores, gross profit has dropped significantly from the same time last year.	Detection rsik --that the finanacial statements might have been mis-stated	It rests solely on the auditor to detect any errors of omission or commission or wrong classification between revenue & capital expenses,etc.	Corrective control
At 4 of the stores, bank deposit slips did not match cash receipts.	Detection rsik --that the finanacial statements might have been mis-stated	It rests solely on the auditor to detect any errors of omission or commission	Corrective control
One of the stores had an unusual number of bounced checks. It appeared that the same employee was responsible for approving each of the bounced checks.	Control risk, which the existing internal control system could not detect--inadequate controls in place.Indicates lacunae in the system itself.	The auditor must test the internal control procedure in this regard, as to the authority of the employee, in signing the checks.	Both corrective (of whatever has occurred) & preventive(for future )
In 7 of the stores, the amount of petty cash on hand did not correspond to the amount in the petty cash account.	Control risk, which the existing internal control system could not detect--inadequate controls in place.Indicates lacunae in the system itself.	First,adequte testing of the prevailing internal control mechanism, for handling of petty cash & periodicity of tallying	Both corrective (of whatever has occurred) & preventive(for future )