Mag’s Pie Shop is a rapidly growing baker anddistributor of specialty pies for f

Question

Mag’s Pie Shop is a rapidly growing baker anddistributor of specialty pies for festive occasions. Mag’sCPA adviser keeps recommending that Mag install better internalcontrols over business. Specifically, the CPA recommends that Magseparate the company’s recordkeeping function from thephysical control of cash and other assets. The CPA also recommendsthat Mag use only preprinted and renumbered forms for all businesstransactions.

a.      Whatis the purpose of internal controls? Be specific.

b.      Foreach internal control suggested by the CPA, give one example of anunsatisfactory situation or event that the control wouldprevent.

Explanation / Answer

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Purpose of internal controls

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To foster the preparation of reliable financialstatements.

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To identify material weaknesses that have a remote liklihood ofcausing material misstatements in the financial statements.

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To protect resources against waste , fraud &ineffeciency.

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To secure compliance with the policies of theorganization.

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Evaluating the level of performance in all organizational unitsof the organization. The firm's CPA is recommending nothing but the Segregation ofduties. Segregation of duties reduce the liklihood of errors andirregularities. An individual is not to have responsibility for more than oneof the three transaction componenets , authorization , custody and recordkeeping . When the work of one employee is checked by another , and whenthe responsibility for custody of assets is separate from theresponsibility for maintaining the records relating to those assets, there isappropriate segregation of duties . This helps detect errors in a timely manner and deter improperactivities This type of internal controls should allow operationaleffeciency & effective communications. Prenumbered documents provide reasonable assurance that allinformation and transactions of value are accurately recorded and retained.

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