Question

Learning Outcome:

• identify and illustrate how the principles of internal control are used to manage and control a firm's resources and minimize risk.

Ebeneezer Company  

Edward Ebeneezer founded Ebeneezer Company, a rapidly growing start-up business, in 2018. Edward hired a record keeper seven months ago.   The record keeper, Wanda Wonderful, left town after the company’s manager discovered that $65,000 had disappeared over the past five months. An audit disclosed that Wanda had written and signed several checks made payable to her husband, Robbing Ron. Wanda recorded the checks as salaries expense.   Robbing, who cashed the checks but never worked for the company, left town with Wanda. As a result, the Ebeneezer Company incurred an uninsured loss of $65,000.

1. Evaluate Ebeneezer Company’s internal control system by listing one principle of internal control that appears to have been ignored.
2. Recommend to Edward how to avoid such a loss in the future with an explanation of the process to mitigate the internal control that was ignored.
3. This first post must include a minimum of 100 words.

Answer 1

1) The principle of internal control that was ignored is 'internal check'.

Internal check is a system of assigning the various accounting tasks of an organization in such a manner that the work of one clerk is automatically checked by another thereby ensuring that no single clerk performs all the tasks of a transaction.

What happened in Ebeneezer, is the lack of internal check in raising vouchers and paying them. The guilty Wanda was entrusted with the task of raising payment vouchers, writing out checks and signing those checks, maintenance of cash book, preparation of bank reconciliation etc. It was because of lack of separation of duties which led to the continuous perpetration of fraud by Wanda. Had Wanda not been entrusted with all the tasks associated with payments, the fraud would not happened for such a long period.

The remedy lies in entrusting the following tasks to different clerks.

*Raising payment vouchers

*Approval of the vouchers

*Writing checks

*Signing of checks

*Maintaining cash book

*Preparation of bank reconciliation.

Similar arrangement should be made for all other accounting work.