Question

Internal Control Case Study

Harper Theater is located in Midtown Mall. The cashier’s booth is near the entrance to the theater. Two cashiers are employed. Once works from 1-5 pm, the other from 5-9 pm.   Each cashier is bonded. The cashiers receive cash from customers and operate a machine that ejects serially numbered tickets. The rolls of tickets are inserted and locked into the machine by the theater manager at the beginning of each cashier’s shift.

After purchasing a ticket, the customer takes the ticket to an usher stationed at the entrance to the theater lobby some 60 feet from the cashier’s booth. The usher tears the ticket in half, admits the customer, and returns the ticket stub to the customer. The other half of the ticket is dropped into a locked box by the usher.

At the end of each cashier’s shift, the theater manager removes the ticket roll from the machine and makes a cash count. The cash count sheet is initialed by the cashier. At the end of the day, the manager deposits the receipts in total in a bank night deposit vault located in the mall. The manager also sends copies of the deposit slip and the initialed cash count sheets to the theater company treasurer for verification and to the company’s accounting department. Receipts from the first shift are stored in a safe located in the manager’s office.

Required: using Microsoft Word, answer the following questions and attach the document to this assignment:

1. Identify the internal control procedures and their application to the cash receipts transactions of the Harper Theater. You will find the Internal Control Procedures (Proper documentation, Adequate insurance, Separation of assets from custody, Separation of duties, and Use of technology). For each Internal Control Procedure, identify any Internal Control Procedures that Harper Theater has in place and/or is missing. Be specific and use at least 300 words for your answer.
2. If the usher and cashier decide to collaborate to misappropriate cash, what actions might they take? For each action, what internal control might be employed to stop the misappropriation of cash? Be specific and use at least 200 words for your answer.

DO NOT COPY PREVIOUS ANSWERS THEY ARE INCORRECT

Answer 1

Part A:-

Since cash is the most liquid of all assets, a business cannot survive and prosper if it does not have adequate control over its cash. Cash is the asset that has the greatest chance of embezzlement and this is why we must ensure that we have strong internal controls build around the cash process. Since many business transactions involve cash, it is a vital factor in the operation of a business. Of all the company’s assets, cash is the most easily mishandled either through error or fraud. To control and manage its cash, a company should:

· Account for all cash transactions accurately so that correct information is available regarding cash flows and balances.

· Make certain that enough cash is available to pay bills as they come due.

· Avoid holding too much idle cash because excess cash could be invested to generate income, such as interest.

· Prevent loss of cash due to theft or fraud.

· Maintaining proper control on cash dealings.

The need to control cash is clearly evident and has many aspects. Without the proper timing of cash flows and the protection of idle cash, a business cannot survive.

Companies protect their assets by

1) segregating employee duties,

2) assigning specific duties to each employee,

3) rotating employee job assignments,

4) using mechanical devices etc.

Internal control procedures adopted and their application to cash receipts transaction by Harper theatre can be identified as follows:-

· Use of machine to eject tickets

· Serially numbered tickets

· Ticket Rolls inserted and locked by the manager at frequent periods

· Presence of usher at the entrance , which is placed reasonably away from cashier

· Usher keeping teared up part of ticket in Locked Box

· At the end of each cashier’s shift, manager removes the ticket roll and making cash count

· Daily reconciliation & deposit of cash balance with bank

· Sending of cash deposit slips, initiated cash count sheets, etc. to company and accounts department

· Safe vault of cash from first shift in managers’ cabin

Similar Industries in the typical market, that have same line of operations of Haper Theatre make use of following internal control techniques as well.

(i) Printing of tickets: Serially numbered pre-printed tickets should be used and designed in such a way that any type of ticket used cannot be duplicated by others in order to avoid forgery. Serial numbers should not be repeated during a reasonable period, say a month or year depending on the turnover. The separate series of the serial should be used for such denomination.

(ii) Ticket sales: The sale of tickets should take place from the Central ticket office at each of the 5 centres, preferably through machines. There should be proper control over the keys of the machines.

(iii) Daily cash reconciliation: Cash collection at each office and machine should be reconciled with the number of tickets sold. Serial number of tickets for each entertainment activity/denomination will facilitate the reconciliation.

(iv) Daily banking: Each day's collection should be deposited in the bank on next working day of the bank. Till that time, the cash should be in the custody of properly authorized person preferably in joint custody for which the daily cash in hand report should be signed by the authorized persons.

(v) Entrance ticket: Entrance tickets should be cancelled at the entrance gate when public enters the centre.

(vi) Advance booking: If advance booking of facility is made available, the system should ensure that all advance booked tickets are paid for.

(vii) Discounts and free pass: The discount policy of the Y Co. Ltd. should be such that the concessional rates, say, for group booking should be properly authorized and signed forms for such authorization should be preserved.

(viii) Surprise checks: Internal audit system should carry out periodic surprise checks for cash counts, daily banking, reconciliation and stock of unsold tickets etc.

PART B:-

If the usher and cashier decide to collaborate to misappropriate cash, what actions might they take? For each action, what internal control might be employed to stop the misappropriation of cash?

Cash is one of the most important assets on a corporate balance sheet. Accordingly, companies should implement a system of controls that protects cash from a multitude of threats. Cash-related fraud is not industry specific and there are numerous frauds that occur with regularity across organizations of all types.

Skimming occurs when cash is stolen before the company records it. Retail organizations are often victimized by this type of fraud. An employee “pockets” the payment and then fails to record (or under-records) the sale.

There are several ways to commit fraud in relation to cash. When Usher & Cashier decides to collaborate to misappropriate cash, they may do like, providing entry to customers without providing ticket, or collecting lower fee than ticketed rate in cash without ticket, (kind of black market) and giving access to mall, etc.

In order to avoid such kind of fraud, manager can implement a customer walk in register at gate, to match with number of entrants with tickets issued.

Also it is preferable to entertain online non-cash payments, online ticketing to avoid larger cash flows.

Implement surveillance cameras at cashier’s desk as well as usher’s point also.

Frequently change employee roles to avoid any malpractices.