Question

AC. U3

INFO

Fraud is the intentional deceit or trickery that results in a misstatement of the financial statements. Management is responsible for taking steps to reduce the risk of fraud. After quite a few instances of fraud in many large, publicly owned companies in recent years, a number of accounting reforms have been put into place to safeguard against fraud. One major change was the Sarbanes-Oxley Act (SOX) of 2002.

SOX included a set of reforms that toughened penalties for corporate fraud, restricted the types of consulting that CPAs can perform for audit clients, and created the Public Company Accounting Oversight Board (PCAOB). SOX requires publicly traded companies to strictly follow government policies and procedures.

Since cash is the most liquid of all assets, it needs to be safeguarded. Both large and small companies are susceptible to fraud and other unethical activities without proper controls are in place. Managers and business owners can protect against fraud by using an internal control system to protect their assets. An effective control system can also help businesses to conduct reliable accounting, operate efficiently, and encourage employees to follow company policies.

To ensure that the internal controls implemented around cash are designed properly, there should be a segregation of duties:

Recordkeeping

Custody

Authorization

Reconciliation

In an ideal situation, there should be one individual assigned the responsibility of only one component. The record keeping function of an asset should be separated from the custody of an asset. In addition, the individual responsible for authorizing a transaction related to cash should not be the same person that has custody of the cash or performs the recordkeeping. Furthermore, reconciliations should be completed by different individuals to ensure that the internal controls are working effectively. This includes doing physical audits, checks, reviews of internal control procedures that are in place to catch errors in time and to avoid fraud.

QUESTIONS

Now that you understand segregation of employee duties, imagine you own a small retail business and employ four employees. Prepare a one to two-page report in which you respond to the following questions. If you use any additional resources, use APA style for your citations.

Identify the type of company you own and briefly describe the nature of your business. Perhaps you sell shoes, clothing, furniture, or computers. You might own a restaurant or a small drug store or small walk-in health clinic.

Identify at least two kinds of internal control procedures that you can implement to protect your cash.

How would you protect the cash in your vault?

How would you protect the cash in your cash register?

How would you protect the cash in your bank account?

How can internal controls help to protect your cash receipts and disbursements?

How can you use technology to implement an effective internal control system to help your business? Explain your answer.

Answer 1

I have a business which is a small restaurant. Here I hire 4 people in total. Of course I would need a cook and a waiter to serve the tables. Other than that I would require a cashier at the counter and an external auditor as well.

Here I would make the cook in charge of purchases but he would require the sanctuary of the auditor for the monthly budget once every month. Once this sanction is given the cashier gives the cook the money to purchase the inputs for the restaurant. However it is the waiter who actually purchases the products from the market using the money and the list of purchases given by the cook. This ensures that all the people share a responsibility which is distinct and there is no overlap. Hence in case of any mismanagement of money one can straight away point out where things have gone wrong.

To protect the cash in the register I have the cashier system where the register opens only when bill is to be paid. Only the cashier is responsible for this. Hence any missing cash can be easily traced.

The cash in the bank is the direct responsibility of the auditor and no other employee has access to it. This ensures direct responsibility.

All the cash resceipts and disbursements are to be approved by the auditor and all the accounts should be appropriately balanced. The direct check on the auditor is me so I can ensure that he remains honest.

Technology so far as I would ideally like is a blockchain based system where every entry is logged in and shared on all the nodes so that all the cash and it's usage can be easily traced.