Question

Hugh Darby, the general manager has discovered a fraud involving the theft of more than $50,000 of cash. The person(s) who stole the cash were waiters/waitresses who simply pocketed any cash they received from restaurant customers and destroyed the relevant bills for the meals charged to these customers. No correcting entries have been posted as yet, because the fraud is still being investigated and Hugh is not sure of exactly how much money has been stolen.

Required: identify three internal controls you would expect to be in place to prevent and/or detect theft of this nature. Your answer should include identifying at least one relevant control related to each of the following:

i) source document design;
ii) independentchecksorreconciliations;and
iii) personnel or segregation of duties.

Answer 1

1) Reconcile Payroll and Staff Records

Have specific management procedures that dictate who can hire, who has scheduling responsibilities, and who can change pay rates.

A second manager should review payroll data before processing. This means double-checking time sheets for hourly employees, overtime and salary wages, as well as reconciling them against the budget. It’s wise to wise to outsource payroll to avoid tax penalties and interest.

2) Personnel or Segregation of Duties

Set a system of checks and balances that requires two or more people to count money or sign off on registers after a shift. This prevents theft and mistakes.

A manager can supervise if a senior crewmember is not available. Pairs of managers can alternate making deposits and reconciling bank statements.

The person signing checks should not be the same one inputting accounts payable data

3) Source Document Design

Documents provide evidence that transactions and events have occurred.

a. Documents should be pre-numbered and all documents should be accounted for Examples would be numbers on checks and invoices (like restaurant receipts).

b. Source documents for accounting entries should be promptly forwarded to the accounting department to help ensure timely recording of the transaction and event.