Internal controls Obj. 2, 3
Ramona’s Clothing is a retail store specializing in women’s clothing. The store has established a liberal
return policy for the holiday season in order to encourage gift purchases. Any item purchased during
November and December may be returned through January 31, with a receipt, for cash or exchange.
If the customer does not have a receipt, cash will still be refunded for any item under $75. If the item
is more than $75, a check is mailed to the customer.
Whenever an item is returned, a store clerk completes a return slip, which the customer signs.
The return slip is placed in a special box. The store manager visits the return counter approximately
once every two hours to authorize the return slips. Clerks are instructed to place the returned merchandise
on the proper rack on the selling floor as soon as possible.
This year, returns at Ramona’s have reached an all-time high. There are a large number of
returns
under $75 without receipts.
a. How can sales clerks employed at Ramona’s Clothing use the store’s return policy to
steal money from the cash register?
b. What internal control weaknesses do you see in the return policy that make cash thefts
easier?
c. Would issuing a store credit in place of a cash refund for all merchandise returned
without a receipt reduce the possibility of theft? List some advantages and disadvantages of
issuing
a store credit in place of a cash refund.
d. Assume that Ramona’s Clothing is committed to the current policy of issuing cash
refunds
without a receipt. What changes could be made in the store’s procedures regarding
customer refunds in order to improve internal control?AppendixLO1