Alternative Distributor Corp., a distributor of groceries and related products, is headquartered in Medford, Massachusetts.

During a recent audit, Alternative Distributor Corp. was advised that existing internal controls necessary for the company to develop reliable financial statements were inadequate.

The audit report stated that the current system of accounting for sales, receivables, and cash receipts constituted a material weakness. Among other items, the report focused on nontimely deposit of cash receipts, exposing Alternative Distributor to potential loss or misappropriation, excessive past due accounts receivable due to lack of collection efforts, disregard of advantages offered by vendors for prompt payment of invoices, absence of appropriate segregation of duties by personnel consistent with appropriate control objectives, inadequate procedures for applying accounting principles, lack of qualified management personnel, lack of supervision by an outside board of directors, and overall poor recordkeeping.

Instructions ; os

(a) Identify the principles of internal control violated by Alternative Distributor Corporation.

(b) Explain why managers of various functional areas in the company should be concerned about internal controls.

367 368 CHAPTER 7 Internal Control and Cash COMMUNICATION ACTIVITY