CASE STUDY Red Bluff Inn & Café Establishing Effective Internal Control in a Sma
ID: 2788963 • Letter: C
Question
CASE STUDY Red Bluff Inn & Café Establishing Effective Internal Control in a Small Business KEY FACTS Francisco Fernandez recently invested in a small 26-room motel and café in a remote tourist area in Southern Utah. Francisco lives in Northern Utah, some five hours from the motel, and only plans to visit the motel periodically Francisco hired a young couple to manage the motel and café. They will live on-site and will have complete control over daily activities and record keeping. Francisco is concerned about having little control over the operations of the motel and café. He has requested help in identifying possible ways the business could be defrauded and in establishing creative internal controls to deter such fraud. What are your two biggest concerns relating to possible fraud for ui the motel part of the business? For each concern, generate two or three controls that could effectively reduce risk related to your concerns. Use common sense and be creative!
Explanation / Answer
1.
Concern 1: Loss of revenue on books: The couple may rent the motel to people and might not register them in books, which will help them take the rental income for themselves rather than giving it to the owner.
Control-
a) Surpise visits by the powner and checking the registers and the rooms occupied at that time.
b) CCTV camera on the recepton to see who all enters and books a room.
c) Every room has a saperate electricity meter, which gets a daily reading record sent to the owner
Concern 2: Risk of giving rooms for wrong reasons, like commertial activity or prostitution/drug deals etc
Control:
a) purpose is stated while checking in the motel
b) ID proof is kept as a part of record from the guest
2.
Concern 1: Giving out free drinks and food to the guests/friends.
Control:
a) Let the couple manage the whole business of cafe as their own by letting them incuriing costs and have lets say 50% of their profits to them.
b) Random visits by owner
Concern 2: Quality of food and drinks is hampered.
a) Let the couple take 50% of the profit
b) Aprt from their base pay, the couple get bonus for achieving the sales target set by the owner each month.
Note: Not doing other questions as the questions are big. Have done first 2 questions as each had 2 parts each, hence have done 4 parts
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