Question

Each situation below describes an internal control weakness in the cash payments process. Identify

which of the five internal control principles is violated, explain the weakness, and then suggest a change

that would improve internal control.

1. The warehouse clerk is responsible for ordering inventory when levels become low and advising

the accounting department to issue a payment to the supplier when ordered goods are

received.

2. For each purchase, the accountant compares the purchase order (prepared by the purchasing

manager) to the receiving report (prepared by warehouse employees) and then attaches these

documents to the corresponding supplier invoice and files them by supplier name. The

accountant then prepares a check, which the owner merrily signs and sends to the mail clerk for

mailing.

3. The check-signing machine is stored with a supply of blank checks in the lunch room closet.

4. Purchase orders can be approved by the purchasing manager, accountant, or warehouse

supervisor, depending on who is least busy.

Answer 1

3. Check signing machine is stored with a supply of blank checks in the lunch room closet. Internal control is weak in this scenario because physical protection of assets is absent over here. Check signing machine is stored with a supply of blank cheks in the lunch room closet and it has no physical security. It should have been physically protection and controlled access to the machine & also to the blank checks.

Change is to report this to the management and ensure physical safety of the machine as well as the blank checks as it can be misappropriated .

4.

Purchase orders can be approved by the purchasing manager, accountant, or warehouse

supervisor, depending on who is least busy.

In This scenario, firms need to differntiate between accounting and financial areas in differnt ways. Purchasing orders should be generated only by employees in the purchasing department. Accountant or the supervisor has no role in purchasing dept. Change here is to seggregate duties based on their fucntions , roles & responsibilites. employess involved in purchasing should not be able to able to generate the purchase orders.