Internal Controls

Ramona's Clothing is a retail store specializing in women's clothing. The store has established a liberal return policy for the holiday season in order to encourage gift purchases. Any item purchased during November and December may be returned through January 31, with a receipt, for cash or exchange. If the customer does not have a receipt, cash will still be refunded for any item under $75. If the item is more than $75, a check is mailed to the customer.

Whenever an item is returned, a store clerk completes a return slip, which the customer signs. The return slip is placed in a special box. The store manager visits the return counter approximately once every two hours to authorize the return slips. Clerks are instructed to place the returned merchandise on the proper rack on the selling floor as soon as possible.

This year, returns at Ramona's Clothing have reached an all-time high. There are a large number of returns under $75 without receipts.

a. How can salesclerks employed at Ramona's Clothing use the store's return policy to steal money from the cash register?

By not issuing a refund, but restocking the merchandise.They can't. The internal controls are adequate.By writing phony refunds and pocketing the cash.By not writing up a refund for a customer and pocketing the cash.

b. What internal control weaknesses do you see in the return policy that make cash thefts easier?

Both inadequate separation of responsibilities, and proofs and security measures.A lack of competent personnel, rotating duties, and mandatory vacations.Not separating responsibilities for related operations.Not separating operations, custody of assets, and accounting.

c. Would issuing a store credit in place of a cash refund for all merchandise returned without a receipt reduce the possibility of theft?

Yes

No

Classify the following as either advantages or disadvantages of issuing a store credit in place of cash.

A clerk could only issue a phony store credit rather than taking money from the cash register.

Advantage

Disadvantage

The store would lose less revenue if customers had to choose other store merchandise instead of getting a cash refund.

Advantage

Disadvantage

Issuing only a store credit for returns without a receipt is a stricter return policy that may affect gift-givers' purchase decisions.

Advantage

Disadvantage

Sales clerks will need to be trained to apply the new policy and write up a store credit. They will also need to be trained to handle the redemption of the store credit on future merchandise purchases.

Advantage

Disadvantage

d. Assume that Ramona's Clothing is committed to the current policy of issuing cash refunds without a receipt. Are there any changes that could be made in the store's procedures regarding customer refunds in order that would improve internal control?

Yes. These could involve management intervention and electronic monitoring.No. A policy this liberal cannot be controlled.