Correcting internal control weaknesses

Each of the following situations has an internal control weakness.

a. Upside-Down Applications develops custom programs to customers’ specifications.

Recently, development of a new program stopped while the programmers

redesigned Upside-Down’s accounting system. Upside-Down’s accountants could

have performed this task.

b. Norma Rottler has been your trusted employee for 24 years. She performs all cashhandling

and accounting duties. Norma just purchased a new luxury car and a new

home in an expensive suburb. As owner of the company, you wonder how she

can afford these luxuries because you pay her only $30,000 a year and she has no

source of outside income.

c. Izzie Hardwoods, a private company, falsified sales and inventory figures in order

to get an important loan. The loan went through, but Izzie later went bankrupt and

could not repay the bank.

d. The office supply company where Pet Grooming Goods purchases sales receipts

recently notified Pet Grooming Goods that its documents were not prenumbered.

Howard Mustro, the owner, replied that he never uses receipt numbers.

e. Discount stores such as Cusco make most of their sales in cash, with the remainder

in credit card sales. To reduce expenses, one store manager ceases purchasing

fidelity bonds on the cashiers.

f. Cornelius’s Corndogs keeps all cash receipts in an empty box for a week because

the owner likes to go to the bank on Tuesdays when Joann is working.

Requirements

1. Identify the missing internal control characteristics in each situation.

2. Identify the possible problem caused by each control weakness.

3. Propose a solution to each internal control problem.

Separation of duties means dividing the responsibilities between two persons.

1. In the first situation the missing internal control is the assignment of responsibilities.
2. In the second situation, the missing internal control is the separation of duties.
3. In the given situation, the missing internal control is internal audit.
4. In the given situation, the missing internal control is the lack of documentation.
5. In the given situation, the missing internal control is another control in which the company ceases the fidelity bonds of the employees.
6. In the given situation, the missing internal control is the assignment of responsibilities.

1. The effect of this weakness is that the company’s books are not maintained properly because the software prepares the books, and they have no knowledge about the accounting procedures.
2. The effect of this problem is that all the duties are given to Norma Rottler, that misuses his duties due to this company having to face heavy losses
3. In this, to get the loan company makes wrong sale figures and the wrong inventory figures, which lead to the company’s bankruptcy.
4. In this company does not follow the documentation that leads to the fraud by employees is the receipts.
5. In this situation, the store owner ceases the fidelity bonds that open the chances of theft by employees.
6. In this, the weak assignment of responsibilities can cause fraud in the cash receipts.

1. This weakness can be solved by assigning accounting procedures to the accounting department.
2. This weakness can be solved by the separation of the duties of Norma Rottler.
3. In this, the company needs to correct their internal audits.
4. In this, the company has to maintain proper documentation to numbered the sales and inventory.
5. In this, the store owner needs to remove cease on fidelity bonds.
6. In this, the company needs to assign a person who regularly deposits the cash receipts in the bank.