Emily is learning how ABC accumulates accounting information. The company has grown quickly and the controls for some transactions, especially cash, have not kept pace with the growth of the operation. Because Emily has taken a few accounting and auditing courses, she would like to take a more active role in ensuring that there are effective controls in place at the business.

Doug, Bev, and Emily discuss the accounting process that is currently in place and the following issues come up:

1. There are two employees who look after sales of computer products and accessories. There is only one cash register. Each employee has their own password. After a client chooses the computer software or supplies they wish to purchase, an employee will pull the inventory off the shelf and proceed to the cash register. After inputting a password, the employee will record what has been sold. The cash register calculates the amount owing, records how the client has paid, and prints a receipt. Sometimes, when the business is busy, the employee will not have a chance to log off a transaction before moving on to the next client. This can result in difficulty tracking which sale was made by which employee.

2. A summary of cash, credit card, and debit card receipts is printed daily. At the end of each day, Doug or Bev attempts to reconcile the summary of receipts to cash deposited. (The deposit is done nightly by Doug or Bev.) Lately, the reconciliation is being done once a week and done all at once. Because of the difficulty with passwords, if there is an error, it is difficult to determine who has made the error in processing a sale. Once they have finished the reconciliation, Doug or Bev enters the amounts into the accounting records.

3. Inventory is usually counted at the end of each month to determine what needs to be ordered and what is available for sale the next month. Purchases of inventory often occur during the month when someone alerts Doug or Bev that a particular product is running low. Sometimes this will result in over purchasing if one of them has already recognized a shortage of a particular type of inventory but has not told the other that the purchase has already been made.

4. A work schedule is made at the start of each month and all overtime must be approved by either Doug or Bev. Lately, additional hours are being worked by all staff because of the demand for services. When the payroll is prepared, Bev attempts to reconcile the monthly schedule with the hours worked by each of the staff members. Because Doug and Bev are not writing down which employee was authorized to work overtime, it is difficult to determine whether the overtime was in fact authorized.

5. Services are invoiced at the time the service has been performed. The invoices are manually prepared by the service manager. A photocopy is made to enable the invoices to be entered in the accounting records.

Instructions

(a) Identify the strengths in ABC's system of internal control. For each strength identified, describe the control activity that is being addressed.

(b) Identify the weaknesses in ABC's system of internal control, and for each weakness identified, suggest an improvement. As well, for each weakness identified, describe the control activity that is violated.