Question

The management at Sampson, Inc. understands that an effective internal control system provides many positives. Among these positives are reliable financial information that enables management to make educated decisions with an opportunity to prevent or detect errors. The internal audit staff at Sampson conducts a periodic review of the organization’s accounting records in order to determine if the system for internal controls is effective.

In the latest audit, the staff found the following situations:

1) Bank deposits and cash receipts do not always reconcile.

2) Decisions and the actual write-offs of bad debt are performed by the same person.

3) Occasional discrepancies exist between physical inventory and the perpetual inventory records.

4) Adjustments to physical inventory counts and the perpetual inventory records have been observed.

5) Customer refunds and credits are not unusual.

6) Original source documents are missing. However, substitute copies of the original source documents are available.

7) Many source documents lack appropriate management approval.

Answer 1

Solution) The effectiveness of internal audit and internal control can only be determined when internal audit staff is equally efficient and works with authority without the interference of management. From the above-said findings, there are some instances which show the effectiveness of internal controls.

in case 1) Bank deposits and cash receipts do not always reconcile, this finding by internal audit staff shows the mismanagement of cash which needs the serious steps to be taken for smoothness of working capital needs.

Several discrepancies exist between physical inventory and perpetual inventory show the managements inefficiency in inventory management which could affect the profitability position of the business.

customers refund and credits are not usual. such finding by internal audit staff reveals the mismanagement and dissatisfaction among customers.

The finding of source documents lacking appropriate approval shows there might be the misuse of funds by some lower level staff, which might be the cause of frauds of various types.

Above said cases also highlights the efficiency of internal controls.