CT$7\mathrm{.}6$ Internal Control and Cash

Emily is learning how ABC accumulates accounting information. The company has grown

quickly, the controls for some transactions, especially cash, have not kept pace with the growth

of the operation. Because Emily has taken a few accounting and auditing courses, she would

like to take a more active role in ensuring that there are effective controls in place at the

business.

Doug, Bev, and Emily discuss the accounting process that currently takes place and the

following issues come up$.$

$1.$ There are two employees who look after sales of computer products and accessories.

There is only one cash register. Each employee has their own password. After a client

chooses the computer software or supplies they wish to purchase, an employee will pull

the inventory off the shelf and proceed to the cash register. After inputting a password,

the employee will record what has been sold. The cash register calculates the amount

owing, records how the client has paid, and prints a receipt. Sometimes, when the

business is busy, the employee will not have a chance to log off a transaction before

moving on to the next client. This can result in difficulty tracking which sale was made

by which employee.

$2.$ A summary of cash, credit card, and debit card receipts is printed daily. Each day, Doug

or Bev attempts to reconcile the summary of receipts to cash deposited. $($The deposit is

done nightly by Doug or Bev.$)$ Lately, the reconciliation is being done once a week and

done all at once. Because of the difficulty with passwords, if there is an error, it is

difficult to determine who has made the error in processing a sale. Once they have

finished reconciling, Doug or Bev enters the amounts into the accounting records.

$3.$ Inventory is usually counted at the end of each month to determine what needs to be

ordered and what is available for sale the next month. Purchases of inventory often

occur during the month when someone alerts Doug or Bev that a particular product is

running low. Sometimes this will result in overpurchasing if one of them has already

recognized a shortage of a particular type of inventory but has not told the other that

the purchase has already been made.

Page $2$

Collaborative Learning Activity to accompany

Financial Accounting: Tools for Business Decision$-$Making

by Kimmel, Weygandt, Mitchell, Trenholm, Irvine and Burnley

CT Collaborative Learning Activity $($Chapter $07)$Student Handout

CT$7\mathrm{.}6$ Internal Control and Cash

$4.$ A work schedule is made at the start of each month and all overtime must be approved

by either Doug or Bev. Lately, additional hours are being worked by all staff because of

demand for services. When the payroll is prepared, Bev attempts to reconcile the

monthly schedule with the hours worked by each of the staff members. Because Doug

and Bev are not writing down which employee was authorized to work overtime, it is

difficult to determine whether the overtime was in fact authorized.

$5.$ Services are invoiced at the time the service has been performed. The invoices are

manually prepared by the service manager. A photocopy is made to enable the invoices

to be entered in the accounting records.

Instructions

$($a$)$ Identify the strengths in ABC$$s system of internal control. For each strength identified,

describe the control activity that is being addressed.

$($b$)$ Identify the weaknesses in ABC$$s system of internal control, and for each weakness

identified, suggest an improvement. As well, for each weakness identified, describe the

control activity that is violated.