Reference no: EM133272842
For the following 6 questions, determine the violation, principle, and solution regarding the internal control principles of accounting.
JHAL (pronounced JAY-Hal) Trader Company is an importer and distributor of value-priced party supplies, toys, and novelties. The company's target market includes carnivals, souvenir gift shops, family fun centers with prize redemption, theme parks, schools, churches, and health care, offering its product to doctors and dentists to reward patients. Due to economic conditions, business is down, and the company needs to consider some cost-cutting measures.
The Chief Financial Officer, Dwight Scott, understands that they need to "tighten their belts" and realizes that several people in the accounting department will have to be laid off. Because of the smaller staff, it is determined that checks will be signed by whomever is available in the department, and accounting records will be reviewed once per year when the physical inventory is taken. Since the department will now be small, it will also be simpler if everyone has a key to the petty cash box.
Because of the layoffs, Dwight will consolidate some of the functions. In the past, he had one employee count payments, another employee prepare the deposit slip, a third employee make deposits at the bank, and a fourth employee complete the reconciliation. Now he is going to have this divided between two employees.
Looking for more cost cuts, the CFO determines that insurance on the warehouse can be eliminated. After all, it is a leased asset, so the building owner has to have insurance on the building overall. Dwight also determines that, since they aren't going to hire new employees anytime soon, and because the company is like a small family and everyone can be trusted, they don't need to pay for bonding insurance. This will make some funds available as well.
One of the areas that is growing in the business is the healthcare market, where doctors and dentists use prizes to reward patients. The top sales rep, Sarah James, has been put in charge of this initiative, and she is making personal calls on healthcare professionals to try to win their business. When doing these calls, she takes samples from the warehouse and puts them into gift bags that she buys on her own. At the end of the month, she determines how much she spent on gift bags and asks John, her friend in accounting, to reimburse her from petty cash. As she is a well-trusted friend, no receipts are required. In addition, she simply estimates how much inventory she has used from the warehouse. It will get reconciled when they do physical inventory at the end of the year. Since business is down, she has to work extra hard and doesn't have time to keep track of these items. And who will miss a few toothbrushes, sand timers, or trinket-type toys anyway?
1. With the smaller staff, it is determined that checks will be signed by whomever is available in the department, and accounting records will be reviewed once per year when the physical inventory is taken.
a. violation: identify the internal control violation.
b. Principle: identify which internal control principle(s) has/have been violated.
c. Solution: provide a solution to fix the internal control violation.
2. Since the department will now be small, it will also be simpler if everyone has a key to the petty cash box.
a. violation: identify the internal control violation.
b. Principle: identify which internal control principle(s) has/have been violated.
c. Solution: provide a solution to fix the internal control violation.
3. Some functions are consolidated. In the past, Dwight had one employee count payments, another employee prepare the deposit slip, a third employee make deposits at the bank, and a fourth employee complete the reconciliation. Now he is going to have this divided between two employees.
a. violation: identify the internal control violation.
b. Principle: identify which internal control principle(s) has/have been violated.
c. Solution: provide a solution to fix the internal control violation.
4. Looking for more cost cuts, the CFO determines that insurance on the warehouse can be eliminated. After all, it is a leased asset, so the building owner has to have insurance on the building overall.
a. violation: identify the internal control violation.
b. Principle: identify which internal control principle(s) has/have been violated.
c. Solution: provide a solution to fix the internal control violation.
5. Dwight also determines that, since they aren't going to hire new employees anytime soon, and because the company is like a small family and everyone can be trusted, they don't need to pay for bonding insurance. This will make some funds available as well.
a. violation: identify the internal control violation.
b. Principle: identify which internal control principle(s) has/have been violated.
c. Solution: provide a solution to fix the internal control violation.
6. The top sales rep, Sarah James, purchases gift bags to use when sharing product samples with potential customers in the healthcare market. At the end of the month, she determines how much she spent on gift bags and asks John, her friend in accounting, to reimburse her from petty cash. As she is a well-trusted friend, no receipts are required. In addition, she simply estimates how much inventory she has taken from the warehouse. It will get reconciled when they do physical inventory at the end of the year. Since business is down, she has to work extra hard and doesn't have time to keep track of these items. And who will miss a few toothbrushes, sand timers, or trinket-type toys anyway?
a. violation: identify the internal control violation.
b. Principle: identify which internal control principle(s) has/have been violated.
c. Solution: provide a solution to fix the internal control violation.