Question

9. Marias boutique uses the following control procedures

I. the employee who works the register reconciles cash to receipts at the end of the day

ii. employees know that the internal auditor will perform a bank reconciliation at the end of each month

iii. cheques are not pre numbered because the purchasing manager must approve payments before cheques are signed

iv. a cashier lets another employee work his assigned register while he helps a customer

v. petty cash is kept in a back room but is not monitored during the day

vi. the companies accountant records the receipt of cash and cheques and makes deposits at the bank

identify the problem with each internal control procedure

Answer 1

The Internal Control structure in an organization is referred to as the ploicies and procedures established by the entity to provide reasonable assurance that the objectives are achieved . The control structure in the organization basically
has the following components:

1. Control Environment: It covers the effect of various factors like management attitude, awareness and actions for establishing, enhancing or mitigating the effectiveness of specific policies and procedures.

2. Accounting System: Series of tasks and records of an entity by which transactions are processed for maintaining financial records. Such system identifies , assemble , calculate, classify , record , summarize and report transactions and other events.

3. Control Procedures: Procedures in addition to control environment and accounting systems which the management has established to achieve the entity's specific objectives.

I. The employee who works the register reconciles cash to receipts at the end of the day:

Separation of Responsibilities: No single person should have complete control over any important aspect of the business operation. Every employee's action should come under review of another person.The person responsible for maintaining Cash Register should not be assigned the responsibility of reconciling it with Cash Receipts at the end of the day. There must be a strict Maker and Checker Policy so frauds or errors conducted by one person can be checked by another. It also acts as a check on employees thereby not allowing one person to approve everything.

II.Employees know that the internal auditor will perform a bank reconciliation at the end of each month

Surprise Checks: The employees are aware that Internal auditor will perform the Bank Recociliation at a Fixed Period i.e, at the end of every month.This enables them to enjoy this Lack of verification on odd dates or surprise checks. Therefore , periodic surprise checks must be conducted to verify the Bank Balance.

III. Cheques are not pre numbered because the purchasing manager must approve payments before cheques are signed

Lack of Adequate Documentation: Pre-numbering helps to prevent the cheques being lost or stolen and to ensure completeness of information. The cheques must be properly numbered so that traceabiliy can be done when any discrepencies in number of cheques issued arises.

IV. A cashier lets another employee work his assigned register while he helps a customer

Clarity of Responsibility: The responsibility of different persons engaged in various opeartions of business transaction should be properly identified. A well integrated organizational chart depicting the names of responsible persons associated with specific functions may help to fix the responsibility.

V. Petty cash is kept in a back room but is not monitored during the day

Safeguarding of Physical Assets: The control procedures lacks Physical security as petty cash is kept in the back room without any Internal Control System such as CCTV's or Guard brings about serious chances of frauds or errors.

VI. The companies accountant records the receipt of cash and cheques and makes deposits at the bank

Separation of Responsibilities: The degree of fraud or error increases with the fact that a single person is accountable for different tasks with high level of risk. If the Cashier does both the things i.e., record receipts as well as deposit in Bank than there might be chances that he delays in depositing Cash the day it receives , if there is nobody who reconciles the Cash Receipt and Cash Deposited.