Question
Reach Higher Inc. (RHI) is a manufacturer of custom forklifts located in the Margaree Valley in Nova Scotia. RHI was started by Bobby McGee in
Reach Higher Inc. (RHI) is a manufacturer of custom forklifts located in the Margaree Valley in Nova Scotia. RHI was started by Bobby McGee in 2012 as an on-site repair solution for forklifts. However, Bobby quickly learned that companies wanted to have custom forklifts that were tailored for their special needs. Seeing an opportunity, he decided to refocus RHI into manufacturing custom forklifts. That was six years ago and, since then, growth has been exponential.
You, CPA, have been hired as a consultant to help Bobby and RHI improve the internal control processes. RHI's growth has been quite rapid and Bobby doesn't feel he has put the time into ensuring the proper internal controls have been designed. Bobby advises you that while he trusts his workers and does not think they would commit fraud, he
does worry that it could happen if RHI keeps growing. Also, as RHI continues to grow, he wants to make sure that the financial reporting is accurate so that he can make strategic decisions.
Bobby provided you with a summary of RHI's accounting systems (Appendix I).
In a Word document, use the following table to do memo, identifying at least five internal control deficiencies in the purchases, payables, and payments cycle, the implications of the deficiencies, and your recommendations for improvement. Ensure you have breadth in your analysis by discussing weaknesses in a variety of areas within the cycle (for example, do not solely focus on purchasing).
Deficiency
Implications
Recommendation(s) for improvement
After you completed your analysis of the internal control deficiencies for the purchases, payables, and payments cycle, Bobby sent you the following email:
"I took a look at the cash flow statement that my controller has prepared (Appendix II). Even though I am not very good at reading financial statements, I was shocked. I'm particularly concerned about our cash situation. We made approximately $115,000 before taxes and our sales increased by almost $126,000, yet our demand bank loan has almost quadrupled in the past year and we have little cash in the bank! I don't understand.
You previously identified that we have weaknesses in our purchases, payables, and payments cycle. Could they have contributed to these cash flow problems? I suppose it is good that at least our sales process is fine! I kept the payment terms for our receivables at 60 days, which is standard for the industry.
I would appreciate it if you would review the cash flow statement and prepare a memo to me explaining the key causes of the company's cash flow issues and demand bank loan situation. Be sure to consider the internal control weaknesses you identified in RHI's existing purchases, payables, and payments cycle."
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