Question

Correcting internal control weaknesses Each of the following situations has an internal control weakness.

a. Upside-Down Applications develops custom programs to customers’ specifications. Recently, development of a new program stopped while the programmers redesigned Upside-Down’s accounting system. Upside-Down’s accountants could have performed this task.

b. Norma Rottler has been your trusted employee for 24 years. She performs all cash handling and accounting duties. Norma just purchased a new luxury car and a new home in an expensive suburb. As owner of the company, you wonder how shecan afford these luxuries because you pay her only $30,000 a year and she has no source of outside income.

c. Izzie Hardwoods, a private company, falsified sales and inventory figures in order to get an important loan. The loan went through, but Izzie later went bankrupt and could not repay the bank.

d. The office supply company where Pet Grooming Goods purchases sales receipts recently notified Pet Grooming Goods that its documents were not prenumbered. Howard Mustro, the owner, replied that he never uses receipt numbers.

e. Discount stores such as Cusco make most of their sales in cash, with the remainder in credit card sales. To reduce expenses, one store manager ceases purchasing fidelity bonds on the cashiers.

f. Cornelius’s Corndogs keeps all cash receipts in an empty box for a week because the owner likes to go to the bank on Tuesdays when Joann is working.

Requirements

1. Identify the missing internal control characteristics in each situation.

2. Identify the possible problem caused by each control weakness.

3. Propose a solution to each internal control problem.

 

Answer 1

Step 1: Definition of separation of duties

 

Separation of duties means dividing the responsibilities between two persons.

 

Step 2: Missing internal control weakness

 

In the first situation the missing internal control is the assignment of responsibilities.

In the second situation, the missing internal control is the separation of duties.

In the given situation, the missing internal control is internal audit.

In the given situation, the missing internal control is the lack of documentation.

In the given situation, the missing internal control is another control in which the company ceases the fidelity bonds of the employees. 

In the given situation, the missing internal control is the assignment of responsibilities.

 

Step 3: Effect of weaknesses

 

The effect of this weakness is that the company’s books are not maintained properly because the software prepares the books, and they have no knowledge about the accounting procedures.

The effect of this problem is that all the duties are given to Norma Rottler, that misuses his duties due to this company having to face heavy losses

In this, to get the loan company makes wrong sale figures and the wrong inventory figures, which lead to the company’s bankruptcy.

In this company does not follow the documentation that leads to the fraud by employees is the receipts.

In this situation, the store owner ceases the fidelity bonds that open the chances of theft by employees.

In this, the weak assignment of responsibilities can cause fraud in the cash receipts.

Step 4: Solution of weaknesses 

 

This weakness can be solved by assigning accounting procedures to the accounting department.

This weakness can be solved by the separation of the duties of Norma Rottler.

In this, the company needs to correct their internal audits.

In this, the company has to maintain proper documentation to numbered the sales and inventory.

 In this, the store owner needs to remove cease on fidelity bonds.

In this, the company needs to assign a person who regularly deposits the cash receipts in the bank.

 

The weakness of the assignment of responsibilities can be removed by assigning the right responsibility to the right person.