Question

For each of these five separate cases, identify the principle(s) of internal control that is violated. Recommend what the business should do to ensure adherence to principles of internal control.

Jen Novinska records all incoming customer cash receipts for her employer and posts the customer payments to their respective accounts.

At Tico Company, Julia and Trevor alternate lunch hours. Julia is the petty cash custodian, but if someone needs petty cash when she is at lunch, Trevor fills in as custodian.

Nori Nozumi posts all patient charges and payments at the Hopeville Medical Clinic. Each night Nori backs up the computerized accounting system to a tape and stores the tape in a locked file at her desk.

Mike Derr prides himself on hiring quality workers who require little supervision. As office manager, Mike gives his employees full discretion over their tasks and for years has seen no reason to perform independent reviews of their work.

Carla Farah's manager has told her to reduce costs. Carla decides to raise the deductible on the plant's property insurance from $5,000 to $10,000. This cuts the property insurance premium in half. In a related move, she decides that bonding the plant's employees is a waste of money since the company has not experienced any losses due to employee theft. Carla saves the entire amount of the bonding insurance premium by dropping the bonding insurance.

Answer 1

1.

"Segregation of Duties" principle is being violated here as different persons receive cash, record receipts, hold the cash and for payments different persons should be help responsible for approving and making payments.

The business should have different persons for different roles related to receiving, recording cash or making payments.

2.

"Establishment of Responsibility" principle is being violated here as internal control is more effective when the control is in single hand for a specific task. There should be only one person acting as the custodian of cash.

The business should keep Julia as the only custodian for petty cash and the timings for taking cash should be fixed other than the lunch time of Julia.

3.

"Physical, Mechanical, and Electronic Controls" principle is being violated here as keeping the assets safe and enhancing the accuracy and reliability of the accounting records is essential. These physical, mechanical and electronic controls help in keeping and storing the data safely in safe hands.

The business should have safes and cabinets for keeping important files, computer locks, alarms, CCTV cameras.

4.

"Independent Internal Verification" principle is being violated here as reviewing the work of employees is important. Independent employee work evaluation is important and reporting should be done to the higher authorities.

The business should audit the performance of each and every employee periodically even if their performance has been more or less stable over the years or even if they have always performed to the expectations of the employer.

5.

"Insurance and Bonding" principle is being violated here as the internal control systems are never too perfect to control the loss of asset. By insuring and bonding, there is a safety that the loss due to theft will be reimbursed. Human element should always be thought of before taking any decision.

The business in order to prevent such costs should keep rotating employees in different roles and also background checks should be there that employees to be hired are trustworthy.