Question

Suppose a company has one retail store with plans to open at least two additional kiosks in a shopping mall.

Other retail outlets and expansion plans may be in the works.

1. List the seven principles of internal control and explain how a retail outlet might implement each of the principles in its store.

2. Do you believe that a retail outlet will need to add controls to the business as it expands? Explain.

Answer 1

1.

Separation of Duties

Separation of duties involves splitting responsibility for bookkeeping, deposits, reporting and auditing. The further duties are separated, the less chance any single employee has of committing fraudulent acts. For small businesses with only a few accounting employees, sharing responsibilities between two or more people or requiring critical tasks to be reviewed by co-workers can serve the same purpose.

Accounting System Access Controls

Controlling access to different parts of an accounting system via passwords, lockouts and electronic access logs can keep unauthorized users out of the system while providing a way to audit the usage of the system to identify the source of errors or discrepancies. Robust access tracking can also serve to deter attempts at fraudulent access in the first place.

Physical Audits of Assets

Physical audits include hand-counting cash and any physical assets tracked in the accounting system, such as inventory, materials and tools. Physical counting can reveal well-hidden discrepancies in account balances by bypassing electronic records altogether. Counting cash in sales outlets can be done daily or even several times per day. Larger projects, such as hand counting inventory, should be performed less frequently, perhaps on an annual or quarterly basis.

Standardized Financial Documentation

Standardizing documents used for financial transactions, such as invoices, internal materials requests, inventory receipts and travel expense reports, can help to maintain consistency in record keeping over time. Using standard document formats can make it easier to review past records when searching for the source of a discrepancy in the system. A lack of standardization can cause items to be overlooked or misinterpreted in such a review.

Daily or Weekly Trial Balances

Using a double-entry accounting system adds reliability by ensuring that the books are always balanced. Even so, it is still possible for errors to bring a double-entry system out of balance at any given time. Calculating daily or weekly trial balances can provide regular insight into the state of the system, allowing you to discover and investigate discrepancies as early as possible.

Periodic Reconciliations in Accounting Systems

Occasional accounting reconciliations can ensure that balances in your accounting system match up with balances in accounts held by other entities, including banks, suppliers and credit customers. For example, a bank reconciliation involves comparing cash balances and records of deposits and receipts between your accounting system and bank statements. Differences between these types of complementary accounts can reveal errors or discrepancies in your own accounts, or the errors may originate with the other entities.

Approval Authority Requirements

Requiring specific managers to authorize certain types of transactions can add a layer of responsibility to accounting records by proving that transactions have been seen, analyzed and approved by appropriate authorities. Requiring approval for large payments and expenses can prevent unscrupulous employees from making large fraudulent transactions with company funds, for example.

In a Retail outlet

Store Design and Security

• Design the Store layout so that customers must pass the register area to exit the store
• Ensure adequate lighting in all areas of the store
• Eliminate blind spots in corners by putting in mirrors or cameras
• Limit the number of items each customer can take to the Dressing Room
• Put alarms in back door/ unused exits, which go off if the exit door is opened
• Close or block off unused checkout aisles
• Install security equipment such as CCTV cameras. If it is a big store then, covering the entire space with cameras may not be feasible. Install dummy cameras to act as deterrence.
• Put Anti-theft tags on small, expensive items or keep them in locked cabinets
• Keep store areas neat and clean so that it’s easier to observe customers and manage security
• Place signs in store which state that shoplifters will be prosecuted to the full extent of the law
• Greet every customer that comes into the store. This serves a dual purpose: First it helps in customer service and second deters shoplifters as they do not want to be noticed.
• Provide personal customer service to as many customers as possible
• Have a Shoplifting Policy and Procedures in place to provide guidance to employees on the following:
  • How to identify suspicious customers or shoplifters?
  • What procedure to follow if a shoplifting event occurs?
• Train new hires on all policies and provide annual training to existing employees
• Have a tips hot line for employees to report potential shrinkage

Sale Terminals

• Sales terminals should show the customer, each item’s cost during the ringing process to prevent incorrect charges
• Require an authorization by a second person before a sale can be voided by the cashier
• Ensure blind counting by someone other than the cashier on a periodic basis
• Provide each customer a receipt for every purchase. Have a policy which states that a customer will receive say $5 if the cashier fails to provide the receipt. Put visible signs at the sale terminals so that the customers are informed of this policy.
• Require receipts for refunds for cash

Owner/Store Manager

• Visit the retail store(s) unannounced.
• Have the store mystery shopped. The mystery shopper can provide feedback on customer service as well as compliance with policies and procedures by employees
• Perform periodic self-assessment audits
• Monitor the cash receipts, sales, customer returns, and promotional reductions on a daily basis. Any unusual variances should be investigated and explained.
• Perform regular inventories of high theft items.
• Perform surprise cash counts.
• Track employee purchases for any unusual activity.

Cash Deposits

• Maintain adequate segregation of duties in the cash deposit process. Different employees should perform the following;
  • Receive, count and deposit cash in Bank
  • Reconcile sales receipts and bank statement
  • Record payments in the General Ledger
• Deposit cash from cash sales daily in bank
• Perform pre-employment background checks on all employees who handle cash

2. A retail outlet will need to add controls to the business as it expands.

More stringent controls has to be put into place to control and monitor the smooth fuctioning of the business and accountability of the employees.

A reatil business may adopt any of the below/ all of the following mwthods to expand its business

1. Add New Locations.
2. Sell on New Channels.
3. Expand Your Product Line.
4. Set Up Pop-Up Shops.
5. Partner with Businesses.
6. Use Automation.
7. Invest in Modern Marketing Methods.
8. Improve the Shopping Experience.

Each of these methods pose new opportunities and place more responsibiities on concerned individuals

Expenditture has to be monitored and controlled, make sure that important decisions regarding marketing, inventory acquisition etc are done under propera authority etc.

Care should be given to the employee hiring process and assiging appropriate responsibilities to capable individuals.