This case study involved evaluating and reporting on the internal controls of a fictitious company with relatively few employees in addition to the store owner. Several potential fraud schemes were developed in order to establish a discussion frame for improving the internal controls of the company, and then based on each of those fraud schemes, the group discussed potential control solutions. Potential Fraud Scheme Internal Control Lucy is responsible for recording sales and In order to comply with separation of duties, preparing bank deposits. Given her autonomy with this process, Lucy could be underreporting sales and failing to deposit all of the money. The store that Kayla owns may have a petty cash fund that was established for smaller and miscellaneous expenses. If they do have a petty cash fund, employees may be incorrectly being reimbursed from the fund. Kayla's store just implemented a new coupon discount program. Employees could be scanning coupons but charging the customers full price and then pocketing the difference. There is no evidence of a system to track the hours that each employee works. Kayla is responsible for the oversight of inventory, orders for new inventory, and payments of inventory. She could commit an act of fraud by falsifying orders, paying them to an external account, and expensing more inventory than actual to make up for the difference. This would reduce the income tax expense of the business by underreporting income while funneling cash out of the business. one employee should be responsible for recording sales and another should be responsible for depositing money for those sales. This separation of responsibility makes it harder for one person to commit this type of fraud. In order to prevent this and ensure that petty cash fund disbursements are accurate, there should be access controls. Kayla should be the custodian. This means that she is the only person that can make payments. Also, Kayla, serving as the custodian, will need to collect receipts as a way of proving accurate disbursement. With this new program, there is limited evidence of processing the transaction. Clerks should have to enter all amounts into the system and keep the coupon with the receipt of the transaction. Kayla should implement a time card system to track exactly when each employee works. A separate employee should be responsible for inventory orders and payment of inventory orders. This separation of responsibility would prevent one person from autonomously falsifying orders to be paid to external accounts. 30 Potential Fraud Scheme There is only one credit card machine for both cash registers. There is no mention of a security system. Each employee has full authority to enter each type of transaction, meaning that they could change previous transactions. Kayla has full custody of assets, and she also does the record keeping. Kayla and Lucy both have access to the accounting system, with Kayla handling all accounting functions and Lucy recording sales data and preparing bank deposits. Internal Control There is no way of knowing which employee is responsible for the credit card sale. There should be a credit card machine for each register so that credit card transactions can be allocated to the correct employee. If a security system was put in place, complete with cameras, then employees would be monitored at all times. Kaya, as the owner, should be the only person with full authority. All other employees should have limited authority that allows them to only record transactions that are directly related to the sales process. Kayla should not be handling so much responsibility within the business since she is the owner of the company. Someone else should be helping with or taking over this area. This is an issue because Lucy and Kayla can both access records, which could lead to small changes to the sales records by Lucy without Kayla realizing it. Thought separation of duties is important, it is also important for the information to be valid and consistent.