Natalie is learning how Koebel's Family Bakery accumulates accounting information. Because Janet and Brian are always busy in the bakery, the accounting for all transactions, especially cash, is sometimes neglected. Because Natalie has taken a few accounting courses, she would like to take a more active role in ensuring that there are effective controls in place at the bakery.
Janet, Brian, and Natalie discuss the accounting process that currently takes place and the following issues come up:
1. There are two employees who work behind the counter and look after customers. There is only one cash register. Each employee has their own password. A customer will come into the bakery, have a look at what baked goods are available behind the counter, and order what they would like from one of the employees. The 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 customer has paid, and prints a receipt. Sometimes, when the bakery is very busy, the employee will not have a chance to log off a transaction before moving on to the next customer. This will sometimes 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. Each day, Janet or Brian attempts to reconcile the summary of receipts to cash deposited. (The deposit is done nightly by Janet or Brian.) Lately, the reconciliation is being done once a week and done all at once. Because of the difficulty with passwords, it is difficult to determine who has made the error in processing a sale. Once they have finished reconciling, Janet or Brian enters the amounts into the accounting records.
3. Inventory is usually counted at the end of the day to determine what needs to be available for sale in the bakery at the start of the next day.
4. A work schedule is made at the start of each month and all overtime must be approved by either Janet or Brian. Lately, additional hours are being worked by all staff because of the additional work required to make cupcakes. When Janet completes the payroll, she attempts to reconcile the monthly schedule with the hours worked by each of the staff members. Because Janet and Brian are not writing down which employee was authorized to work overtime, it is difficult to determine whether the overtime was in fact authorized.
5. Cupcakes shipped to Coffee Beans coffee shops are invoiced when the shipment is completed. The invoices are manually prepared by date. A photocopy is made to enable the invoices to be entered in the accounting records.
6. Purchases of inventory occur when one of the bakers alerts Janet or Brian that a particular product is running low. Sometimes this will result in over-purchasing if either Janet or Brian has already recognized a shortage of a particular type of inventory and not told the other that the purchase has already been made.
Instructions
(a) Identify to Natalie the strengths in Koebel's system of internal control. For each strength identified, describe the control activity that is being addressed.
(b) Identify to Natalie the weaknesses in Koebel'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.