Question 1 (8 marks)

The following are independent situations.

Required

For each of the two independent situations, identify two control weaknesses, and explain the implications of these weaknesses for the companys accounting records. (4 marks for each situation). Prepare your answer in the following format:

Internal Control Weakness	Implication for Companys Accounting Records
(Example only no marks) The store does not use serially pre-numbered sales invoices.	Sales invoices could be lost or omitted and sales would be understated.
(Example only no marks) Employees are not bonded.	No implication for companys records (implication for risk of loss)

Situation 1

A finance company derives a large part of its business from financing retail purchases of furniture and electronic items, with terms generally over 2 or 3 years. Each day, there is a large volume of mail to process, which contains cheques, money orders, and customer correspondence. An account associate opens the mail, sorts the contents into payments or correspondence, and then prepares a payment listing. The account associate takes the cheques to the bank for deposit, but the payment listing is given to a separate person to enter into the computer. The manager spot-checks the total deposited in the bank to the payment listing to ensure that all funds are deposited.

All cheques for purchases over $15,000 must be approved by 2 supervisory personnel. Given the small size of the office, this includes only the manager, the assistant manager, and the accountant. This restricts the number of signees who may be on vacation at any one time and creates a problem when one or, especially, two of these people are away from the office on business trips. The staff eventually came up with a win-win solution, based on the petty cash concept. The office manager keeps a cash box locked in her desk, containing three blank cheques, each one signed by one (but only one) of the three designated signees. When a cheque is needed and there arent two people with signing authority there to sign it, the office manager or her assistant has the available signee approve the amount and payee, and then sign the cheque to complete the control procedure.

Situation 2

Occasionally, the plant manager for a paper products manufacturer makes a deal with a supplier, presumably to get a good discount, and instructs the accounting staff to prepare a cheque in a hurry without the normal purchase order documentation that is supposed to be attached to the cheque stub. This allows the plant to have a just-in-time system for purchasing when a bargain is available from a supplier. Unfortunately, this also means that the regular purchase order may not be prepared and sent to the shipper/receiver in time for the goods, so the accounting department has to manually prepare a receivers memo with the information that is normally on a regular purchase order (e.g., description of goods, suppliers name, quantity purchased) to let the shipper/receiver know that goods will be arriving for which the regular documentation may not be ready in time.