Question

Mr. Smith owns 100% of Parent Company (PC). Mr. Smith has been an entrepreneur all his life and as a result owns four businesses through PC which include Holdco Ltd. (Holdco), a holding company. Mr. Smith plans to sell his businesses one by one over the next few years. He is considering selling Holdco this year. Holdco owns 100% of Swiss Sub Ltd. (SS). Swiss Sub is a food franchise that sells freshly toasted sandwiches made to customers’specifications.

Swiss Sub has three stores located in Thunder Bay and is run by Mr. Smith’s brother Gary. Gary and Mr. Smith have had a rocky relationship over the years, however, Mr. Smith indicates that they were able to put aside their differences five years ago and Gary is now the manager of Swiss Sub.

You, were just recently employed by Mr. Smith as a junior controller of PC. Mr. Smith has requested that you provide him with a report which contains an analysis of Swiss Sub’s operations and any changes you think would improve the operations. Mr. Smith has indicated that it is important to ensure that Swiss Sub is running smoothly before it is put up for sale. He reminds you not to let Gary know of the possible sale as he would just worry about his job which is unfounded as he intends to have Gary help him manage some of his personal real estate investments.

Mr. Smith also notes that most of the accounting functions such as payroll, inventory purchases, payables etc. for Swiss Sub are also conducted at PC. Your meeting with Gary is summarized in Exhibit I.

EXHIBIT I
Notes from Meeting with Gary

-Gary manages the busiest Swiss Sub store; the other two stores are run by store managers who report directly to Gary.

-You spend some of your time chatting with employees. You overhear a cashier named Dan reminding Gary that he has to leave early today to perform his community service duties due to a minor incident at the mall 5 months ago. Gary tells Dan to have fun. Gary later tells you that Dan is his newest employee who he hired 4 months ago. Gary indicates that Dan closes the store at Midnight as he leaves Swiss Sub at 8:00PM.

-Gary tells you that he feels that he is not recognized for all the hours he dedicates to the three stores. He tells you that he gives himself a $1,000 bonus each year for his efforts since he got hired from petty cash. Gary also tells you that he has informed Mr. Smith of this in passing. You remember that PC does not reconcile Swiss Sub’s pretty cash since it is deemed to be insignificant. It is also your understanding that Gary’s salary of $50,000 is equivalent to fair market value.

-You speak to the janitor, Mr. Rogers, who tells you that he is fed up with Dan’s friends always coming into the store before closing as they have no respect for anyone and eat like they have never seen food.’

-Gary tells you that his new drive-through window is working out wonderfully. He indicates that currently his store is the only store of the three Swiss Sub locations that have a drive-through, as it is the busiest. He indicates that Sherry has been really efficient taking orders, preparing orders for the customer and processing their payments. Gary explains that the customer s love Sherry’s sunny personality and she has regular customers that go through the drive-thru every day.

-You ask Gary how profits have been. He comments that is has been business as usual however over the last few months he has noticed that his inventory appears to be lower than the amount of sales that he is generating. Gary indicates that he is looking into the problem but is baffled. Gary also indicates that he is not sure what calculations he should do that will help him quantify inventory discrepancies compared to sales levels which will alert him to an inventory problem in the future. He adds that to date his inventory and sales analysis is limited to comparing current inventory and sales levels to the prior year.

-Gary is upbeat that the operation is running smoothly. Although he indicates that Jenny who has been a cashier for a year and a half is rather clumsy as she always seems to be voiding transactions because of punching incorrect orders into the cash register. Gerry has also noticed that as Jenny prepares a customer’s order she takes her time.

-Gary indicates that he has tried to create a pleasant work atmosphere by allowing employees to receive free meals. He explains that employees are giving $5.00 worth of food for lunch and dinner for their meals. The meal receipts are located in a drawer by the cash register. Employees fill out the vouchers and give them to whoever is on cash.

-Gary explains that Sherry is extremely helpful as she aids him in opening the store and deposits all of the cash for from the day before in the bank each morning. Gary also explains that Sherry compares the cash register tapes to the deposits.

-Gary informs you that in order to increase employee moral he has recently implemented an employee of the month recognition program whereby an employee is selected each month and given $50. According to Gary he selects the employee of the month based on the number of hours they are working and whether they show up on time to work. You notice Jenny has been employee of the month two months in a row.

REQUIRED

1. Using Weakness/Implication/Recommendation (WIR), what are the audit issues for Human resource controls?

Answer 1

Hey there !!

In this question we have to identify the Audit issues for Human Resource Controls using the Weakness/ Implication / Recommendation technique.

Let us first identify the weaknesses we notice for each event, then we will discuss their implications and then we may give recommndation to the Management for its improvement.

Then, we have to provide him with a report which contains an analysis of Swiss Sub’s operations and any changes you think would improve the operations.

1) -Gary, the store head feels that he is not recognized for all the hours he dedicates to the three stores. He gives himself a $1,000 bonus each year for his efforts since he got hired from petty cash.

This self rewarding technique is not fair by the store head himself. Since there is no superior over him that doesn't authorise the storehead to reward himself.

2) PC does not reconcile Swiss Sub’s pretty cash since it is deemed to be insignificant.

This is not right on part of PC. Although the amount is insignificant for PC but the amount is significant on the part of SWiss Sub. Also, there is high scope of misstatement in petty cash.

So, the PC should oversee the reconciliation of Petty cash at Swiss SUB.

3) Dan’s friends always coming into the store before closing as they have no respect for anyone and eat like they have never seen food.

This is abuse of Authority. The owner has given the responsibilty of shut down of store to this employee but he is misusing his authority and making personal gains by allowing his friends tto eat whatever they want to everyday.

This practice should be stopped. and the duty of shut down should be rotated frequently.

4) Sherry has been really efficient taking orders, preparing orders for the customer and processing their payments.

There is no sgregation of duties in this case.The lack of segregation of duties is inappropriate since it does not separate accounting entry from payment and can result in finance staff making inappropriate accounting entries.  Fraud could occur without being detected in time to prevent it.

5)  his inventory appears to be lower than the amount of sales that he is generating.

6) He adds that to date his inventory and sales analysis is limited to comparing current inventory and sales levels to the prior year.

In the above cases there is strongly a need for phusical verification of inventory, controls over stock in and stock out should be maintained and it should be checked that there is no misappropriation of stocks.

7)  Jenny who has been a cashier for a year and a half is rather clumsy as she always seems to be voiding transactions because of punching incorrect orders into the cash register. Gerry has also noticed that as Jenny prepares a customer’s order she takes her time.

There is no sgregation of duties in this case.The lack of segregation of duties is inappropriate since it does not separate accounting entry from payment and can result in finance staff making inappropriate accounting entries.  Fraud could occur without being detected in time to prevent it.

8) The meal receipts are located in a drawer by the cash register. Employees fill out the vouchers and give them to whoever is on cash.

There is a scope of misuse and making personal gains. There should be a proper responsible person who should issue these coupons and exercise control over the activities.

9) Gary explains that Sherry is extremely helpful as she aids him in opening the store and deposits all of the cash for from the day before in the bank each morning. Gary also explains that Sherry compares the cash register tapes to the deposits.

Again,

There is no sgregation of duties in this case.The lack of segregation of duties is inappropriate since it does not separate accounting entry from payment and can result in finance staff making inappropriate accounting entries.  Fraud could occur without being detected in time to prevent it.

Management should clearly define the authority responsibility relationships.

I hope the solution is clear to you now. You may also add your own ideas and remedies in the above stated solution.

Do let me know if you have any concerns !!

All the best !!