Internal Controls Scenario

Internal controls

Instructions

​Scenario

Following are several internal control weaknesses of a small retail business in regard to its cash receipts and accounts receivable. For each internal control weakness:
1. explain how the weakness might result in a loss of assets.
2. explain what action should be taken to correct the weakness

Open Ended

i. Sales invoices are not pre-numbered

Why is this a problem?

What should be done to fix it?

​Suggested Answer:

After a credit sale has been made but not recorded, the related sales invoice could be lost or stolen. Without pre-numbered sales invoices, there is no way to trace the invoice serial numbers to detect the unrecorded sale.

All sales invoices should have pre-printed serial numbers

Open Ended

ii Receipts from daily sales are deposited every Tuesday and Thursday evening.

Why is this a problem?

What should be done to fix it?

​Suggested Answer:

ii On nights other than Tuesday or Thursday, the business risks having its unattended cash stolen during the night. The business’s bank also does not have a record of its daily cash receipts, so the business cannot verify them.

The business should deposit all its cash receipts daily in its bank account

Open Ended

iii One employee is responsible for depositing customer cheques from collections of accounts receivable and for recording their receipt in the accounts.

Why is this a problem?

What should be done to fix it?

​Suggested Answer:

iii The employee might lose a customer’s cheque and fail to record it, or the employee might steal a cheque and hide the theft by erroneous recordings.

The responsibility for recording cash receipts and accounts receivable should be assigned to one employee and the depositing of customer cheques should be assigned to another employee.

Open Ended

iv For credit sales on terms of 2/10, net/30, customers are still allowed, a discount if payment is received within 20 days.

Why is this a problem?

What should be done to fix it?

​Suggested Answer:

iv The business is losing interest that it could have earned for 10 days on the amount of money that customers pay late.

The business should establish strict rules that any payments received from customers after the discount period (10 days) has expired must be for the full amount

Open Ended

v A money box is used instead of a cash register to store both the sales invoices and cash from sales.

Why is this a problem?

What should be done to fix it?

​Suggested Answer:

v An employee may lose sales invoices so that the business cannot keep track of its sales. An employee or customer may also steal the cash

The business should use a cash register to produce sales receipts and protect its cash

Open Ended

vi Credit sales of a large dollar amount can be approved by any sales employee.

Why is this a problem?

What should be done to fix it?

​Suggested Answer:

vi A credit sale might be made to a customer with a poor credit rating who is very unlikely to pay for the sale

Written approval by the credit department should be required for all large credit sales

Open Ended

vii When customers write cheques for payment, only the identification of customers who ‘look untrustworthy’ is verified.

Why is this a problem?

What should be done to fix it?

​Suggested Answer:

vii The business may receive cheques that ‘bounce’ from customers who appear ‘trustworthy'.

The business should require that all customers paying with cheques be asked to provide proper identification

END