Question

King Companies, Inc (KCI) is a private company that owns five auto parts stores in urban Los Angeles, California. King Companies has gone from two auto parts stores to five stores in the last three years, and it plans continued growth. Eric and Patricia King own the majority of the shares in KCI. Eric is the chairman of the board of directors of KCI and CEO, and Patricia is a director as well as the CFO. Shares not owned by Eric and Patricia are owned by friends and family who helped the Kings get started. Eric started the company with one store after working in an auto parts store. To date, he has funded growth from an inheritance and investments from a few friends. Eric and Patricia are thinking about expanding by opening three to five additional stores in the next few years.

In October 2021, Eric approached your accounting firm, Thornson & Danforth, LLP, to conduct an annual audit of KCI for the year ended December 31, 2022. KCI has not been audited before, but this year the audit has been requested by the company's bank because of anticipated bank loans and by a new private equity investor that has just acquired a 20% share of KCI.

KCI employs 20 full-time staff. These workers are employed in store management, sales, parts delivery, and accounting. About 40% of KCI's business is retail walk-in business, and the other 60% is regular customers where KCI delivers parts to their locations and bills these customers on account. During peak periods, KCI also uses part-time workers.

Eric is focused on growing revenues. Patricia trusts the company's employees to work hard for the company, and she feels they should be rewarded well. The accounting staff, in particular, is very loyal to the company. Eric tells you that accounting staff enjoy their jobs so much they have never taken any annual vacations and hardly any workers ever take sick leave.

There are two people currently employed as accounting staff, the most senior of whom is Jonathan Jung. Jonathan heads the accounting department and reports directly to Patricia. He is in his late fifties and hopes to retire in two or three years and move away from Los Angeles. Jonathan keeps a close watch on accounting and does many activities himself including opening mail, cash receipts and vendor payments, depositing funds received, performing reconciliations, posting journals, and performing the payroll function. His second employee, Abby Owens, is a recent college graduate who just passed the CPA exam. Abby is responsible for the payroll functions and posting all journal entries into the accounting system. Jonathan and Abby often help each other out in busy periods.

Evaluation: Based on what you know about the accounting system, what recommendations would you offer in terms of control activities?

Answer 1

The summary of the above case is that we need to address is that, the entire accounting process is handed over to 2 employees and those employees won't take any vacations or leaves. One of them was a senior and the other was a fresh career starter.

Based on the facts it may be possible that the accounting staff is involved in some sort of fraudulent activities and so as a fear towards being caught they are not interested in taking leaves and so. And it is clearly evident that the junior gets easily influenced by the senior in the department because the junior doesn't know how the outside workplace will be as he is just a beginner.

The recommendations that would be suggested are, divide the work among the employees, Patricia being the CFO should involve directly in the accounting review activity and also look after the remittances and collections in a frequent basis. Employees should be granted vacations at times to have a check in their work as to any frauds are being committed by them even if they are not interested so.