Question

Question 1

The following are independent situations. Required For each of the two independent situations, identify two control weaknesses, and explain the implications of these weaknesses for the company’s accounting records. (4 marks for each situation). Prepare your answer in the following format:

Internal Control Weakness	Implication for Company’s Accounting Records
(Example only — no marks) The store does not use serially pre-numbered sales invoices.	Sales invoices could be lost or omitted and sales would be understated.
(Example only — no marks) Employees are not bonded.	No implication for company’s records (implication for risk of loss)

Situation 1

A finance company derives a large part of its business from financing retail purchases of furniture and electronic items, with terms generally over 2 or 3 years. Each day, there is a large volume of mail to process, which contains cheques, money orders, and customer correspondence. An account associate opens the mail, sorts the contents into payments or correspondence, and then prepares a payment listing. The account associate takes the cheques to the bank for deposit, but the payment listing is given to a separate person to enter into the computer. The manager spot-checks the total deposited in the bank to the payment listing to ensure that all funds are deposited. All cheques for purchases over $15,000 must be approved by 2 supervisory personnel. Given the small size of the office, this includes only the manager, the assistant manager, and the accountant. This restricts the number of signees who may be on vacation at any one time and creates a problem when one or, especially, two of these people are away from the office on business trips. The staff eventually came up with a win-win solution, based on the petty cash concept. The office manager keeps a cash box locked in her desk, containing three blank cheques, each one signed by one (but only one) of the three designated signees. When a cheque is needed and there aren’t two people with signing authority there to sign it, the office manager or her assistant has the available signee approve the amount and payee, and then sign the cheque to complete the control procedure.

Situation 2

Occasionally, the plant manager for a paper products manufacturer makes a deal with a supplier, presumably to get a good discount, and instructs the accounting staff to prepare a cheque in a hurry without the normal purchase order documentation that is supposed to be attached to the cheque stub. This allows the plant to have a just-in-time system for purchasing when a bargain is available from a supplier. Unfortunately, this also means that the regular purchase order may not be prepared and sent to the shipper/receiver in time for the goods, so the accounting department has to manually prepare a receiver’s memo with the information that is normally on a regular purchase order (e.g., description of goods, supplier’s name, quantity purchased) to let the shipper/receiver know that goods will be arriving for which the regular documentation may not be ready in time.

Answer 1

Scenario: 1

Internal Control Weakness	Implication for Company’s Accounting Records
Risk of theft & fraud	Since blank cheques are signed in advance by one authorized signatory. However there will be lapse of internal control as earlier maker and checker concept was prevailing while in present scenario single person authorizing the transaction in absence of other will also update the same in books of accounts, thus this will lead to risk of fraud.
Manipulation in books of accounts	As mentioned in scenario the accountant is also one of the authorizer however as per internal control policy authorised signatory should not be allowed to make entry in books of accounts thus issue of substance over form may arise, as there can be manipulated transactions for the events not occur.

Scenario: 2

Internal Control Weakness	Implication for Company’s Accounting Records
Risk of queries, dispute and possible legal consequences	Since there is no Purchase Order placed hence there could be scenario the goods received does not meet the quality standard and in such scenario dispute will arise since there were no pre specified standards thus this may result in legal consequences. Thus the adjustments then will be done accordingly in books of accounts.
There has been no purchase order placed in advance for price determination	There could be risk that immediate discount can be understated on paper resulting in higher payment then actual purchase price.