Question

Natalie is struggling to keep up with the recording of her accounting transactions. She is spending a lot of time marketing and selling mixers and giving her cookie classes. Her friend John is an accounting student who runs his own accounting service. He has asked Natalie if she would like to have him do her accounting.

John and Natalie meet and discuss her business. John suggests that he do the following for Natalie.

1.   Hold onto cash until there is enough to be deposited. (He would keep the cash locked up in his vehicle). He would also take all of the deposits to the bank at least twice a month.

2.   Write and sign all of the checks.

3.   Record all of the deposits in the accounting records.

4.   Record all of the checks in the accounting records.

5.   Prepare the monthly bank reconciliation.

6.   Transfer all of Natalie’s manual accounting records to his computer accounting program. John maintains all of the accounting information that he keeps for his clients on his laptop computer.

7.   Prepare monthly financial statements for Natalie to review.

8.   Write himself a check every month for the work he has done for Natalie.

Instructions

1. Identify the weaknesses in internal control that you see in the system that John is recommending. NOTE: Be specific and address the 8 issues presented.
2. Suggest any improvements to the Internal Controls if John is hired to do Natalie’s accounting? Specifically address the weaknesses identified.

Answer 1

All the weaknesses in Johns system along with how they can be improved are written in a paragraph by paragraph format below:

1.)

There are many weaknesses in the internal control that John is recommending. John recommends holding on to the cash until there is enough deposited, he says that the cash could be kept locked up in his vehicle, this seems highly risky simply because this increases the risk of a theft. This situation could easily be improved by depositing whatever cash is made into the bank on a daily basis for safekeeping.

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2.)

Another issue with Johns recommendation is that he says he would write and sign all the checks. It must be noted that the same individual writing and signing the checks not only increases the risk of fraud but is actually against the accounting principle of segregation of duties. This problem can be solved by dividing the duties, i.e, John could write the checks but as Natalie is the boss she is the one who would have signing authority, this way she can double check all the checks that are being signed for.

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3,4, & 5.

John says that he would record all the deposits and checks, he would also prepare the bank reconcilliation. This is a big weakness in the system because all accounting tasks cannot be done by the same person. The reason being that it increases the risk of fraud. For example if john wants to commit a fraud he can eliminate entering one of the deposits in the company accounts and eliminate it from the bank reconciliation and keep the money for himself and no one would find out. In order to correct this either natalie or another individual should prepare the bank reconciliation statements.

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6 & 7.

John wants to transfer all of Natalie's manual accounting records to his computer accounting program, this a major internal control weakness as it increases the risk of fraud and also increases the risk of theft of company information. A simple solution to this is to not allow John to back data up on his personal laptop. If transferring the data is necessary then it should be done on a company laptop that Natalie has access to.

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8.)

John absolutely should not be allowed to write checks for himself at the end of every month because this authority provided to him can be easily exploited. In order to improve the situation, Natalie should be the one to write checks for his employee, John.

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Really hope this helps! Thankyou.

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