Question

The following independent situations have weaknesses in the internal control.

i. Dina has been your trusted employee for 24 years. She performs all cashhandling and accounting duties. Dina just purchased a new luxury car and a new home in an expensive suburb. As owner of the company, you wonder how she can afford these luxuries because you pay her only RM30,000 a year and she has no source of outside income.

ii. The office supply company where Danish Company purchases sales receipts recently notified Danish Company that its documents were not prenumbered. Danish, the owner, replied that he never uses receipt numbers.

iii. Farah Company’s clerk keeps all cash receipts in an empty box for a week because the owner likes to go to the bank on Tuesdays when Farah is working.

iv. Ain Woods, a private company, falsified sales and inventory figures in order to get an important loan. The loan went through, but Ain later went bankrupt and could not repay the bank.

a. Explain the missing internal controls and the possible problem/s caused by each of the control weaknesses above. [30 marks]

b. Propose a solution to each of the internal control problems in Q2(a).

Answer 1

a. The internal controls missing in the cases discussed above and the problems caused by them are :

i) In the first case, preventive internal control is missing as it helps to prevent situations that would have negative impacts. Here in this situation, if the company had proper preventive internal control, then they would not have assigned all cash handling works alone to Dina. It would have been distributed among two three members so that no one can committ some fraud.

The problem caused by missing of this internal control is that, Dina is successful in doing some type of fraud by which she has gained so much wealth to arrange various luxuries for her as only she is looking after the cash movement and all type of payments. Thus, it leads to causing loss to the company.

ii) Here the internal control which is missing is corrective internal control. Danish when knew that he is not using receipts number, which may cause problems should have made the receipts prenumbered to remove the problems being faced. If the corrective controls were proper, then it would have corrected and maintained the documents by prenumbering them to remove the confusion.

The problem caused by this lack of corrective internal control is that, there is no any proper management of documents and thus they may get displaced amd one would have no clue of it. If they were numbered it would have been easy to find them, or atleast have q knowledge that a receipt is missing. Thus, this missing of corrective measure is not good for the organization as things are not properly managed.

iii) Here detective internal control is missing as this detective internal control would have detected if any cash receipts are missing or not while they are kept in an empty box.

The problem caused by missing of this internal control is that, company would not be able to detect the losses it's making, to know who is committing such fraud in organization. The company would ho on making kiss amd the person doing wrong would go on doing activities without the knowledge of any one.

iv) The internal control missing with the bank was detective internal control. The bank if had a proper detective internal control, it would have gone through the financial statements, their calculations being done, whether they are correct or fair or not.

The problem caused because of lack of this internal control is that the bank has created a bed debt in the form of the loan given to the company, which is noelw impossible to recover. Thus the bank is in loss.

b. Solutions to each problems are :

i) In the first case, preventive measures should be taken by the organization like it could appoint more than one person on cash handling activities. This would help in keeping a observence on the employees working with cash so that they may not do some type of fraud, as done by Dina.

ii) In the second case, Danish should try to correct the mistake that is causing major issues to the organization's works. Numbering the receipts would help manage the receipts well. And thus this would solve the problem of corrective internal control being missing.

iii) Farah should keep a proper record of the receipts which she is keeping in the empty box and before they all are taken to bank, one should check that all the receipts are available to be taken to bank. Thus will maintain the record for cross checking and would reduce any situation of confusion. This would also benefit the organization by reducing the risk of loss being faced by company.

iv) Here for this case, bank should have properly checked all the documents and their bases on which they have been prepared. While reviewing it, bank would have known that wrong figures are represented to them by the company. And then, they would analyse if it seems that company has potential to return it back, they are being provided withvtge loan otherwise not.

This helps the banks to analyze its gain or liss by providing loans to a party.

So these are the ways to solve the problems being arised.