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Ch 8-3 Exercises & Problems

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Internal Controls
Ramona's Clothing is a retail store specializing in women's clothing. The store has established a liberal return policy for the holiday season in order to encourage gift purchases. Any item purchased during November and December may be returned through January 31, with a receipt, for cash or exchange. If the customer does not have a receipt, cash will still be refunded for any item under $75. If the item is more than $75, a check is mailed to the customer.
Whenever an item is returned, a store clerk completes a return slip, which the customer signs. The return slip is placed in a special box. The store manager visits the return counter approximately once every two hours to authorize the return slips. Clerks are instructed to place the returned merchandise on the proper rack on the selling floor as soon as possible.
This year, returns at Ramona's Clothing have reached an all-time high. There are a large number of returns under $75 without receipts.
a.  How can sales clerks employed at Ramona's Clothing use the store's return policy to steal money from the cash register?
 
b.  What internal control weaknesses do you see in the return policy that make cash thefts easier?
 
c.  Would issuing a store credit in place of a cash refund for all merchandise returned without a receipt reduce the possibility of theft?
 
Classify the following as either advantages or disadvantages of issuing a store credit in place of cash.
A clerk could only issue a phony store credit rather than taking money from the cash register.
 
The store would lose less revenue if customers had to choose other store merchandise instead of getting a cash refund.
 
Issuing only a store credit for returns without a receipt is a stricter return policy that may affect gift-givers' purchase decisions.
 
Sales clerks will need to be trained to apply the new policy and write up a store credit. They will also need to be trained to handle the redemption of the store credit on future merchandise purchases.
 
d.  Assume that Ramona's Clothing is committed to the current policy of issuing cash refunds without a receipt. Are there any changes that could be made in the store's procedures regarding customer refunds in order that would improve internal control?
 

Answer 1

a. They can just do out a return slip and put an item from the store floor on the rack and take the cash.

b. There is issue with the responsibilities assigned as the same clerk issue refunds and put the stock on rack, there could be cash theft easily. In order to avoid, continous supervisionis must.

c. A store credit can help surely. Management could raise question if many store credits are available with the employee., so there will no theft. Atleast they cannot take cash directly.

A clerk could only issue a phony store credit rather than taking money from the cash register. - Advantage

The store would lose less revenue if customers had to choose other store merchandise instead of getting a cash refund. - Advantage

Issuing only a store credit for returns without a receipt is a stricter return policy that may affect gift-givers' purchase decisions. - Disadvantage

Sales clerks will need to be trained to apply the new policy and write up a store credit. They will also need to be trained to handle the redemption of the store credit on future merchandise purchases. - Both - Training will be time consuming but it can serve a good control for future and one time exercise so advanges are much.

d. First control could be-

different people could be assigned for issuance of refund and return the stock on rack

Strict supervision is must - The company can use Camera. It will increase cost but in can create a control that each activity is being recorded