Question

Illustrate your understanding of internal controls by providing an example of a control you have personally witnessed (at the gym, supermarket, a restaurant etc.) – do not use a traditional business setting, such as those detailed in your textbook. In your example make sure you cover the following: a. Describe the control in detail (including the setting). b. What was the control trying to achieve (ie. prevent/safeguard)? c. What specific general ledger account could the control be linked to? d. What assertion could the control have been addressing (ie. safeguarding)? e. How could an auditor test the control?

Answer 1

I will take the example of an internal control put in place in a super market I go to regularly. After you put the items you want in the shopping cart and move to the check out counter, there are 3 people involved in the proces:
1. One checks the items and quantities and bills the same
2. This bill is then taken to the cashier where the payment has to be made and the cashier would stamp the bill as 'paid'.
3. This is then taken to the delivery counter where upon producing the bill, the purchased items are handed over to you.

3 people are involved in this process. Why you may ask?
This internal control is commonly understood as 'Division of duties' or maker checker concept, where the duty of one person is dependant on the duty of the preceding employee. This is an automatic check put in place. For example, the cashier has to ensure the items, quantities and prices are proper and only when payment is recieved he stamps the bill. The delivery person hands over the items only when he receives a copy of the bill showing that it is paid for.

This control prevents the risk of misappropriation of goods/ inventory. It is linked to inventory and also cash a/c. Each transaction must be supported by a bill copy that states paid. The name of cashier, date, day and other details on bill copy show whether the authorized person is handling cash payments and cash book at the end of the day must equal the cash in hand.

This checks operating effectiveness of the company. It also indicates the completeness assertion, in the sense that by make sure that each record of sale must be evidenced by a bill and by checking the cashier's statements we can identify if bills and statement matches. transactions should not be hidden from books.

An auditor can test this control by using some of these techniques
1. She can observe the control while it takes place
2. Test Inventory record, Voucher register, cashier statements with bills hard copy for a few days to see if it tallies
3. She has to check who has authority for each task by confirming with the management.

Other procedures can also be followed but these are just a few.