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.

Discuss which principles of internal control appear to have been ignored for the For Company.

Answer 1

The following are the principles of Internal Control :

1. Separation of Duties
2. Accounting System Access Controls
3. Physical Audits of Assets
4. Standardized Financial Documentation
5. Daily or Weekly Trial Balances
6. Periodic Reconciliations in Accounting Systems
7. Approval Authority Requirements

In the given scenario the following are the control principles which got ignored :

• Separation of Duties : The book keeper shall not be allowed with cash/ cheques responsibility because he has capacity to alter the books of accounts as per his wish and he can misuse the cash or bank balance of the company for his self purposes
• And also it had been discovered that the book keeper had issued cheques and recorded them as salaries, it means that the company has no control over the employee record and payments made or if they have been made it depicts that the book keeper had changed the information accordingly as per his needs.
• The company should conduct periodical review so that they can find-out such issues at an earlier stage.

Note : The principles of Internal controls could be universal, but the view of dealing with the scenario may differs from person to person. SO the answer is as per my view

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