Question

Michelangelo Shoes was founded by Buonarroti Simoni in 1996 and has grown steadily over the years. Buonarroti Simoni now has 23 stores located throughout the Southern and Eastern parts of Australia. Buonarroti Simoni, born of migrant Italian parents, was an accounting major in college but loved high fashion shoes for men and women. He worked for a large regional CPA firm for 13 years prior to opening his first shoe store. He places a lot of value on internal controls. Further, he has always insisted on a state-of-the art accounting system that connects all of his stores’ financial transactions and reports. Buonarroti Simoni employs two internal auditors who monitor internal controls and also seek ways to improve operational effectiveness. As part of the monitoring process, the internal auditors take turns conducting periodic reviews of the accounting records. For instance, the company takes a physical inventory at all stores once each year, and an internal auditor oversees the process. Chris Chen, the most senior internal auditor, just completed a review of the accounting records and discovered several items of concern. These were: Physical inventory counts varied from inventory book amounts by more than 5% at two of the stores. In both cases, physical inventory was lower. Two of the stores seem to have an unusually high amount of sales returns for cash. In 10 of the stores gross profit has dropped significantly from the same time last year. At four of the stores, bank deposit slips did not match cash receipts. One of the stores had an unusual number of bounced cheques. It appeared that the same employee was responsible for approving each of the bounced cheques. In seven of the stores, the amount of petty cash on hand did not correspond to the amount in the petty cash account. Requirements For each of these concerns, identify a risk that may have created the problem. Recommend an internal control procedure to prevent the problem in the future. PLEASE PROVIDE ANSWER IN DETAIL AS IT IS REQUIRED FOR EXAM PREPARATION

Answer 1

Controls For Inventory:

Reasons for Difference between Book Records and Physical Verification Inventory may be

Sales made not accounted in books or there may be normal loss which is yet to be accounted

If there are following controls Difference will not prevail in future

Physical Tracking:

Establish a system for responsible employees to verify delivery, receipt and storage of inventory. Create a paper trail of internal documentation and cross-check to ensure items received and those on invoice are identical. Confirm that a system of signing items out of inventory and into sales exists, that it requires signature authorization and compliance is enforced as policy. Confirm that all shipments of products are identical to invoiced sales documents. Adopt measures to ensure that inventory is not reduced in company records until documentation is checked and items are shipped. Make sure that shipping records are verified and costs for shipping are accounted for in costs of goods sold.

Inventory Management Systems:

Ensure that a strong inventory tracking and management system is in place and that key personnel able to use it. Access to inventory master files and the ability to modify, delete or change data should be restricted. Verify that inventory management systems are relevant aids for assessing times to reorder or replenish various products. Assess the warehouse layout to determine if placement of particular products can assist managers in making visual inspections to check against information in the inventory system.

Segregate Duties:

Separate the duties involved in purchasing, ordering, receiving and storage of inventory. Different managers should be appointed to oversee sales, inventory management and purchasing departments. Establish a basic audit schedule and conduct unannounced audit or checks frequently. Assemble a plan for conducting physical inventory counts when necessary.

Controls for Petty Cash Difference between Actual Cash And Records Cash:

• When determining materiality, look at the total activity going through petty cash in a given period, not just the balance at month- or year-end. An account with a $10,000 balance at month-end may have $45,000 of activity throughout the month.
• Petty cash is not a free-for-all. Know where, to whom, and for what your petty cash is being used. Ensure that standardized, adequate, and consistent documentation is retained with proper authorization from an individual independent of the disbursement process. Documentation should include:
  • Name of individual receiving the disbursement;
  • Date and time of disbursement;
  • Purpose of disbursement;
  • Amount of disbursement;
  • General ledger expense account for the disbursement;
  • Signature of individual receiving the disbursement;
  • Receipt documenting the expense related to the disbursement (if reimbursement rather than advance); and
  • Signature of independent individual approving the disbursement.
• Ensure that each disbursement and receipt from/to petty cash is booked to the proper account at the time it is disbursed/received. If entries must be booked in batches, ensure that there is adequate support to retrace the transaction if needed.
• Count petty cash and reconcile to the general ledger on at least a monthly basis.
• Review separation of duties. The employee with physical custody of the petty cash should not be recording related activity in the general ledger. The employee with the power to approve and record fund disbursement should not physically disburse the cash.
• Perform surprise cash counts on a periodic basis and investigate any variance between expected and actual cash.

Controls to Prevent bouncing of Cheques:

1. Balance your checking account so that you know how much you have to spend. If you don’t have the money, don’t write the check. Be sure to account for automatic deductions and online bill payments.

1. Review account balances before you spend. Login to your accounts online (you can even use your mobile device). Visit an ATM for a balance inquiry or call your bank if you have to -- it’s worth taking an extra moment to stop bouncing checks.
2. Use a budget so that you know where every dollar goes before you even get it. Planning ahead means you can cover the necessities and keep realistic expectations about additional nice-to-have spending. ?
3. Stop electronic payments if they’re tripping you up. The best way to understand and control your spending is to do everything manually. Once you stop bouncing checks go ahead and resume using technology. Note that you may not be able to do everything manually (or it may cost more to write checks than to use online bill pay) so you might want to pick and choose what to take offline.

You can still use your bank's online bill payment system to pay bills, but it's best to personally look at every bill that comes in and decide when to pay it. Using online bill pay allows you to just click "Submit" (once everything is set up) and avoid paying postage.

5) Get an overdraft line of credit for when all else fails. It’s generally the least expensive option at the bank.

You can avoid bouncing checks for the most part with the steps above, but it’s a good idea to have a safety net in place.