INTERNAL CONTROLS FOR DAMAGED MERCHANDISE. The Warehouse Store sells merchandise to retail customers, using a catalog and a showroom. The firm has a policy that merchandise that has been damaged is identified in each store and offered for sale at 35% of cost to employees of that store. Merchandise to be sold at the reduced price is identified by store stockroom employees when they notice the damage.

Recently, the firm’s accountant noticed that the quantity of merchandise that was being sold as damaged had increased substantially in one store. A quiet investigation was undertaken. The investigation revealed that most of the merchandise being sold was actually undamaged. The investigation also revealed that a small group of employees were buying much of the undamaged merchandise and reselling it at a profit to friends and relatives. In fact, some of these employees were using the firm’s catalog to solicit orders for “damaged” merchandise.

REQUIRED:

Propose some internal control procedures that could be used to make it more difficult for employees to steal from the firm in this way.