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.

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

Internal Controls are a system of checks and balances designed to prevent and detect fraud and errors. Most companies have these systems in place, but many have never completely documented them. Companies are finding that it is a costly process but perhaps badly needed. Already intense examination of internal controls has found lingering problems in the way companies operate. Many problems involved closing books, revenue recognition deficiencies, reconciling accounts, or dealing with inventory. Cash Control: Cash is the asset most susceptible to improper diversion and use. Management faces two problems in accounting for cash transactions: 1. to establish proper congtrols to prevent any unauthorized transactions by officers or employees, and 2. to provide information necessary to properly manage cash on hand and cash transactions. To safeguard cash and to ensure the accuracy of the accounting records for a cash , companies need effective internal control over cash. Causes for Fraudulent Financial Reporting: Fraudulent financial reporting usually occurs because of conditions in a company's internal or external environment. Influences in the internal environment relate to poor internal control systems, management's poor attitude toward ethics, or perhaps a company's liquidity or profitability. Those in the external environment may relate to industry conditions, overall business environment, or legal and regulatory considerations.             Opportunities for fraudulent finacial reporting are present in circumstances when the fraud is easy to commit and when detection is difficult.

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