Question

Read the Richard’s Furniture Company case that starts on page 58 of the textbook (problem 11) and then describe how internal control could be strengthened at Richard’s.

Richards Furniture company is a 15-store chain, concentrated in the southwest, that sells living room and bedroom furniture. Each store has a full-time manager and an assistant manager, who are paid on a salary basis. The cashiers and sales personnel typically work part-time and are paid an hourly wage plus a commission based on sales volume. The company uses cash registers with four-part sales invoices to record each transaction the invoices are used regardless of the payment type. On the sales floor the slaesperson manually records his or her employee number and the transaction totals the invoice and calculates any approriate discount and the sales tax retaining one copy in the sale book. The cashier reviews the invoice and inputs the slae into the cash register. The cash reigister automatically assigns a consecutive number to each transaction. The cashier is also reponsible for obtaining credit autorization approval on credit card sales and approving slaes paid by check. The cashier gives one copy of the invoices to the customer and retains the second copy as the store copy. Returns are handled in exactly the reverse manner with the cashier issuing a return slip when necessary. At the end of each day the cashier sequentially order the slaes invoices and provides cash register totals for cash CC and check sales as well as cash and cc returns. These totals are reconciled by assistant manger to the cash register tapes the total of the consecutively number sales invoices, and the return slips. The assistant manager prepare a daily reconciled report for the store manager's to review. Cash sales check sales and CC salesare reviewed by the manager who then prepares the daily bank deposit. the manager physically deposits these at the bank and files a validation deposit slip. at the end of the month the manger performs the bank reconcilation. The cash register tapes sales invoices return slips and reconciled reports are then fowarded daily to the centeral data entry depaortment at corporate headquarters for processing. The data entry depaortment returns a weekly sales and commision activity report to the managers to review.

Answer 1

The internal control could be strengthened at Richard’s by letting a member of the accounting staff reconcile the bank statement of the organization. Currently the store manager does the reconciliation. Secondly the statements should be reconciled more than once a month. Currently the statements are reconciled on a monthly basis. Thirdly the credit granting responsibilities should not be on the shoulders of the cashier. The organization should establish a separate credit department so that the cashier is relieved from the credit-granting responsibilities. Another thing that needs to be done at Richard’s is that an altogether different process for merchandise returns should be created. Lastly the company should stop accepting checks from customers so as to avoid being exposed to credit risks.

The above mentioned internal controls will help the company avoid credit risk, liquidity risk, regulatory risk and human error risk.