CASE STUDY INTERNAL CONTROL

Honkydory Musical School wants to raise money for a new sound system for its auditorium. The primary fund-raising event is a dance at which the famous disc jockey, Obnoxious Emanem will play funky hip-hop and not so funky hip-hop dance tunes. Mr Bean, the music and theater instructor, has been given the responsibility for coordinating the fund-raising efforts. This is Beans first experience with fund-raising. He decides that the choir students to be in charge of the event: he will be a relatively passive observer.

Bean had 500 unnumbered tickets printed for the dance. He left the tickets in a box on his desk and told the choir students to take as many tickets as they thought they could sell for $10 each. In order to ensure that no extra tickets would be floating around, he told them to dispose of any unsold tickets. When the students received payment for the tickets, they were to bring the cash back to Bean, and he would put it in a locked box in his desk drawer.

Some of the students were responsible for decorating the gymnasium for the dance. Bean gave each of them a key to the money box and told them that if they took the money out to purchase materials, they should put a note in the box saying how much they took and what it was used for.

After 2 weeks the money box appeared to be getting full, so Bean asked Luke Wilson to count the money, prepare a deposit slip, and deposit the money in a bank account Bean has opened. The day of the dance, Bean wrote a check from the account to pay the DJ Obnoxious Emanem , however said that he accepted only cash and did not give receipts. So Bean took $ 500 out of the cash box and gave it to Emanem. At the dance Bean met Mel Brooks working at the entrance to the gymnasium, collecting ticket from the students and selling tickets to those who had not pre-purchased them. Bean estimated that 400 students attended the dance.

The following day Bean closed out the bank account, which had $450 in it, and gave that amount plus the $ 300 in the cash box to the Principal Bottoms. Principal Bottoms seemed surprised that after generating roughly $ 4000 in sales, the dance netted only $ 750 in cash. Bean did not know how to respond.

REQUIRED:

Discuss the what is meant by internal control and the importance of it for businesses. Do you agree that internal control exist because most people cant be trusted? Justify your answers. Based on the case study above, identify the internal controls violated and advise how Honkydory Musical School on the best action possible to address the weaknesses.

Points to note:

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