Ex. 7-3 a. The sales clerks could steal money by writing phony refunds and pocketing the cash supposedly refunded to these fictitious customers. b. Ramona's Clothing suffers from inadequate separation of responsibilities for related operations because the clerks issue refunds and restock all merchandise. In addition, there is a lack of proofs and security measures because the supervisors authorize returns two hours after they are issued. c. A store credit for any merchandise returned without a receipt would reduce the possibility of theft of cash. In this case, a clerk could only issue a phony store credit rather than taking money from the cash register. A store credit is not as tempting as cash. In addition, sales clerks could only use a few store credits to purchase merchandise for themselves without management getting suspicious. An advantage of issuing a store credit for returns without a receipt is that the possibility of stealing cash is reduced. The store will also lose less revenue if customers must choose other store merchandise instead of getting a cash refund. The overall level of returns/exchanges may be reduced because customers will not return an acceptable gift simply because they need cash more than the gift. The policy will also reduce the "cash drain" during the weeks immediately following the holidays, allowing Ramona's Clothing to keep more of its money earning interest or use that cash to purchase spring merchandise or pay creditors. 7-6 2022 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 7 Internal Control and Cash Ex. 7-3 (Concluded) A disadvantage of issuing a store credit for returns without a receipt is that preholiday sales might drop as gift-givers realize that the return policy has tightened. After the holidays, customers wishing to return items for cash refunds may be frustrated when they learn the store policy has changed. The ill will may reduce future sales. It may take longer to explain the new policy and fill out the paperwork for a store credit, lengthening lines at the return counter after the holidays. Sales clerks will need to be trained to apply the new policy and write up a store credit. Sales clerks also will need to be trained to handle the redemption of the store credit on future merchandise purchases. d. The potential for abuse in the cash refund system could be eliminated if clerks were required to get a supervisor's authorization for a refund before giving the customer the cash. The supervisor should only authorize the refund after seeing both the customer and the merchandise that is being returned. An alternative would be to use security measures that would detect a sales clerk attempting to ring up a refund and remove cash when a customer is not present at the sales desk. These security measures could include cameras or additional security personnel discreetly monitoring the sales desk. Finally, an employee on the following work shift could be assigned the responsibility to restock returned merchandise and reconcile the returns to a refund list for the department. Internal Controls