Question

 

Albert Mona has worked at Crimson Electricals for more than 8 years. He is a very diligent employee who never calls in sick and staggers his vacation days throughout the year so that no other staff member has taken on his tasks for more than one day. As a small retailer, Crimson employs only three people other than the owner. The owner, with his in-depth knowledge of the trade, focuses exclusively on serving the customers. One employee handles all receiving, stocking and shipping of merchandise and another employee handles the purchasing, payroll, general ledger, inventory and accounts payable function.

Albert handles all receipts from cash sales and prepares the daily deposits for the business. In addition, he opens the mails and deposits all cheques. Albert also keeps the accounts receivable records and bills the customers who purchase on credit.

Required:

a) Identify the control weaknesses at Crimson Electricals.

b) Assume that no additional employee can be hired, make some recommendations to remedy the

identified weaknesses.

Answer 1

a) Following are the control weaknesses at Crimson electricals.

1. No segregation of duties.

2. No dual control over the transactions

3. No job rotation of employees

4. Only one employee or Albert is controlling the cash transaction from receipt of cash from sales to deposits.

5. No dual control on computer, emails.

6. There is three different employees for three different activities.

7. Owner is not supervising the activities performed by employees.

8. No authorisation procedure followed

b) Following are the remedies for control weaknesses.

1. Duties of employees should be segregated. It is a basic internal control principle of business that divides the responsibility and critical functions more than one employee. Merchandise received by one employee should be checked by other employee.

Employee who is responsible for payroll, purchasing, inventory and accounts payable translation should be authorised by owner or other employee.

Albert handles all cash receipt and prepare daily deposit instead owner or other employee should check and prepare daily deposit to avoid fraud.

In this without hiring any additional employee work of three employee and owner can be controlled by way of job rotation and dual control among employees.

2. Work of one employee should be checked by other employee.

3. After certain time job rotation among employee can control fraud and misbehaviour. Rotation among three employees from one function to another after specific time interveral.

4. Employee should go on vacation at least once in a year.

5. Before processing of transaction authorisation should be obtained.

6. Email and computer should be supervised and authorised by owner.

7. Documentation of all transactions should be maintained.

8. Timely reconciliation of accounts by owner or other employee apart from employee who is responsible for function.