9-18. Gayton Menswear (Risk Assessment and Control Procedures)

The Gayton Menswear company was founded by Fred Williams in 1986 and has grown steadily over the years. Fred now has 17 stores located throughout the central and northern parts of the state. Since Fred was an accounting major in college and worked for a large regional CPA firm for 13 years prior to opening his first store, he places a lot of value on internal controls. Further, he has always insisted on a state-of-the art accounting system that connects all of his stores financial transactions and reports.

Fred employs two internal auditors who monitor internal controls and also seek ways to improve operational effectiveness. As part of the monitoring process, the internal auditors take turns conducting periodic reviews of the accounting records. For instance, the company takes a physical inventory at all stores once each year, and an internal auditor oversees the process. Chris Domangue, the most senior internal auditor, just completed a review of the accounting records and discovered several items of concern. These were:

• Physical inventory counts varied from inventory book amounts by more than 5% at two of the stores. In both cases, physical inventory was lower.

• Two of the stores seem to have an unusually high amount of sales returns for cash.

• In 10 of the stores gross profit has dropped significantly from the same time last year.

• At four of the stores, bank deposit slips did not match cash receipts.

• One of the stores had an unusual number of bounced checks. It appeared that the same employee was responsible for approving each of the bounced checks.

• In seven of the stores, the amount of petty cash on hand did not correspond to the amount in the petty cash account.

  Requirements

  1. For each of these concerns, identify a risk that may have created the problem. 2. Recommend an internal control procedure to prevent the problem in the future.