22. For each of the independent cases below, identify the principle of internal

Question

22. For each of the independent cases below, identify the principle of internal control that is violated, and recommend what should be done to remedy the violation. (1.) In order to save money, Regal Company has decided to drop its property insurance on assets, and to stop bonding the cashiers who handle about $10,000 in cash each day. (2.) Halton Company records each sale on a preprinted invoice. Since sometimes invoices are spoiled when they are prepared, the invoices are not prenumbered, but the sales clerk writes the next number onto each invoice. (3.) Marion Company is a very small business. Bob Lepley, one of the two office clerks, opens the mail each day and removes the cash receipts that come in the mail. Bob then records the receipts in the cash records and the customer's account and deposits the cash in the bank. (4.) Gerald McNichols, the owner of MeNichols Company prides himself on hiring only the most competent employees. McNichols believes that since these employees are highly competent and to show that he trusts them completely, he feels there is no need for anyone to check up on the employees' performance. (5.) Service Products is a small business with only 3 accounting employees. Each employee is well-trained and so can perform any of the accounting tasks, including handling cash receipts and cash disbursements, and preparing the bank reconciliation.

Explanation / Answer

1.The principle of internal control that has been violated is “insure assets by bonding key employees”. The recommendation is to insure assets and bond key employees. Even though it may save money in the short run, insurance protects the company if assets are stolen. Bonding reduces the risk of loss from the theft of cash by employees. It also discourages theft because bonded employees know that an independent company will be involved when a theft is discovered. It is unlikely that the bonding company will be sympathetic to any employee involved in the theft.

2. The principle of internal control that has been violated is “maintain records”. The recommendation is to maintain adequate records. All important documents, including sales invoices, should be renumbered. This will help ensure that all sales are recorded and that salespeople cannot pocket cash from a sale and destroy the sales invoice.

3. The principle of internal control that has been violated is “segregation of duties”. The recommendation is to divide responsibility for related transactions. Lepley has too many responsibilities with respect to cash. He controls the cash and maintains the records of cash. These responsibilities with respect to cash should be split up among several employees. One person should open the mail (ideally with a second employee present), and prepare a list in triplicate that indicates each sender's name, the amount sent, and an explanation of why the money was sent. One copy goes to the cashier with the money. The cashier deposits the money in the bank and records the amounts received in the accounting records for cash. The second copy goes to the record keeper in the accounting area who records the amounts in the customer's records. The third copy stays with the person who opens the mail. Lepley may carry out one of these tasks, but not all of them.

4. The principle of internal control that has been violated is “performing regular independent reviews” The recommendation is to perform regular and independent reviews. Even the most competent person sometimes makes mistakes. Sometimes individuals who appear honest may turn out not to be. McNichols should set up regular, independent reviews of each employee's performance to evaluate possible errors and to ensure that procedures are followed.

5. The principle of internal control that has been violated is “establishing responsibilities”. The recommendation is to establish responsibilities. Each employee should be assigned specific tasks. Now, if a problem occurs, it is difficult to know who is at fault. It is hard to hold employees accountable for their actions if it cannot be determined who is responsible for the action.

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