The West End Boutiques company was founded by Libbie Williams in 1990 with a sin

ID: 2414519 • Letter: T

Question

The West End Boutiques company was founded by Libbie Williams in 1990 with a single store in College Station, Texas, and the company now has 21 shops located in the triangle of Dallas, San Antonio, and Austin, Texas. Libbie was an accounting major in college, passed the entire CPA exam in her first attempt with high scores, and worked for one of the large CPA firms for 11 years prior to opening her first store. Based on her work experience, she fully understands the value of strong internal controls. Further, she recently selected a state-of-the art accounting system that connects all of her stores' financial transactions and reports.

Libbie employs two internal auditors who monitor internal controls and also search for ways to improve operational effectiveness. As part of the monitoring process, the internal auditors take turns conducting periodic reviews of the accounting records. For instance, the company takes a physical inventory at all stores once each year and an internal auditor oversees the process. Chris Domain, the most senior internal auditor, just completed a review of the accounting records and discovered several items of concern. These were:

Physical inventory counts varied from inventory book amounts by more than 6% at two of the stores. In both cases, physical inventory was lower.

Two of the stores seem to have an unusually high amount of sales returns for cash.

In 9 of the stores, gross profit has dropped significantly from the same time last year.

At 4 of the stores, bank deposit slips did not match cash receipts.

One of the stores had an unusual number of bounced checks. It appeared that the same employee was responsible for approving each of the bounced checks.

In 7 of the stores, the amount of petty cash on hand did not correspond to the amount in the petty cash account.

Requirements

For each of these concerns, identify a risk that may have created the problem.

Recommend an internal control procedure to prevent the problem in the future.

Explanation / Answer

For each of following concerns, risk are as under:

Concern: Physical inventory counts varied from inventory book amounts by more than 6% at two of the stores. In both cases, physical inventory was lower.

Solution: Since physical inventory was lower hence risk is that inventory of the co. has been stolen.

Concern: Two of the stores seem to have an unusually high amount of sales returns for cash.

Solution: In case of sales return risk is that sales volume will decrease significantly and profit will be lower of the Company.

Concern: In 9 of the stores, gross profit has dropped significantly from the same time last year.

Solution: Since in 9 of the stores of the company has been dropped significantly hence there is a risk that Company’s overall profit will get reduced and it may be possible that co. may suffer loss.

Concern: At 4 of the stores, bank deposit slips did not match cash receipts.

Solution: Since bank deposit slips did not match cash receipts hence risk is that cash may be embezzle by the employees.

Concern: One of the stores had an unusual number of bounced checks. It appeared that the same employee was responsible for approving each of the bounced checks.

Solution: Bounce cheque is a major concern and risk associated with this is that company may face legal issue, because counter party (to whom cheque is issued) may sue the company.

Concern: In 7 of the stores, the amount of petty cash on hand did not correspond to the amount in the petty cash account.

Solution: Since petty cash on hand did not match with petty cash it means that cash is missed, hence risk is that cash may be embezzle by cashier.

Internal control procedures to prevent above problems in future

Concern: Physical inventory counts varied from inventory book amounts by more than 6% at two of the stores. In both cases, physical inventory was lower.

Solution: Physical inventory variance from inventory book can be eliminated by proper check. Manger should impalement a system so that every outgoing and incoming of inventory both physical and in books can be recorded. Furner by installing camera and other tools manger can control any stealing of inventory.

Concern: Two of the stores seem to have an unusually high amount of sales returns for cash.

Solution: First of all manager should record the reasons for sales return, after that two machenism should be followed

Another effective internal control for this is having the system require an override by a supervisor or manager for the return to be accepted.

Concern: In 9 of the stores, gross profit has dropped significantly from the same time last year.

Solution: Segregation of duties is important for a business to profit increasingly. One manager should not be responsible for all departments. West End Boutiques will put in place a budget that allocates cost to each department. All expenses must be approved within budget. These allowable costs will help to increase gross profit and keeps the business efficient. The company’s finances will also be audited periodically unannounced.

Concern: At 4 of the stores, bank deposit slips did not match cash receipts.

Solution: Segregation of duties is one of the most effective internal controls to cash receipts. The cashier will not be in charge of balancing the stores daily cash intakes. The closing supervisor will be responsible for balancing the day’s cash which will be audited the next day by a manager to the register totals. The manager will then prepare the bank’s deposit, which is done by a courier or another manager. At the end of each month the bank statement will be reconciled against the receivables general ledger

Concern: One of the stores had an unusual number of bounced checks. It appeared that the same employee was responsible for approving each of the bounced checks.

Solution: West End Boutiques will have a supervisor approve all checks before acceptance. The check will then be converted to an e-check, which goes through an electronic verification process to determine if the check is good or bad. Once this is completed, the funds will be debited from that customers account through overnight processing. This eliminate the checks been returned and does not rely on the same person for approval.

Concern: In 7 of the stores, the amount of petty cash on hand did not correspond to the amount in the petty cash account.

Solution: The petty cash should never be accessible by all employees. This will be locked in a safe or vault that requires two employees (preferably a manager and another employee) to gain access. Once cash is removed from the petty cash, both persons will write a receipt and sign for the cash. The receipts will then be audited at the end of each month and an invoice sent to accounting for replenishment. These receipts and invoice may be electronic which allows for faster processing of replenishment and a good audit trail.