Home repair Corp(HRC) operates a building maintenance and repair business. The b

Question

Home repair Corp(HRC) operates a building maintenance and repair business. The business has three office employees- a sales manager, a crew manager and an accountant. HRC's cash payment system is described below.

A) After a contract is signed with a customer, the sales manager prepares a prenumbered purchase requisition form that indicates the materials needed for the work at the repair site.

B)Based on the purchase requisition form, the crew manager prepares and sends a prenumbered purchase order to suppliers of materials, advising them of the specific materials needed and the repair site to which they should be delivered.

c) The crew manager is the only employee authorized to order goods.

d) Upon receiving a suppliers invoice, the accountant compares it to terms indicated on the purchase order, noting in particular the prices charged and quantity ordered.
e) If these documents are in agreement, the accountant prepares a prenumbered check,stamps the invoice"paid" and prepares a journal entry to record the payment. The journal entry explanation references the sequential number on the purchase order.
f) HRC's owner prepares a monthly bank reconciliation and review checks returned with the bank statement to ensure they have been issued to valid suppliers.

Required :
1) For each statement (a)-(f), Identify the internal control principle being applied.
(these include: establish responsibility, segragate duties, restrict access, document procedures, independently verify)

2)After several months, HRC's materials/crew manager is arrested for having $20,000 of materials delivered to his home, but charged to the company. Identify the internal control weakness that allowed this theft to occur.

Explanation / Answer

1. A. Document procedures

B. Segregate duties, document procedures.

C. Segregate duties, restrict access, establish responsibility

D. Independently verify

E.Segregate duties, document procedures

F. Document procedures,Establish responsibility, indepently verify

2. The internal contols pertaining to purchase of goods are very weak. The owner of the business instead of engaging in establishing responsibility and independently verifying and authorising transactions himself has delegated the same to the crew manager and the accountant, ans keeps himself occupied by making bank reconciliation statements ( a purely ministerial function to reconcile the differences between the bank balance as per cash book and that as per the bank statement). Segregation of duties is also not up to the mark . The duty of drawing up the BRS should be with the accountant.

Each purchase requisition form should be scrutinised by the owner on the basis of the contract signed with the customer. If he endorses the same, he should send a signed copy to the crew manager, and see to it that quotations are invited through sealed tenders from vendors with impeccable track record. The tenders should be opened in his presence, the lowest bid selected, after which the crew manager may be authorized to place the purchase order with the vendor.

It is obvious in the given case that the sales manager and the crew manager have both colluded to commit the fraud. The accountant has been negligent in not being able to discover the fraud and blowing the whistle, unless he too is party to the fraud.

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