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Q30PSB

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Horngren'S Financial And Managerial Accounting
Found in: Page 423

Short Answer

Correcting internal control weaknesses

Each of the following situations has an internal control weakness.

a. Jade Applications has decided that one way to cut costs in the upcoming year is to

fire the external auditor. The business believes that the internal auditor should be

able to efficiently monitor the company’s internal controls.

b. In an effort to minimize the amount of paperwork, Ross Homes has decided that it

will not keep copies of customer invoices related to sales revenue. Ross believes that

this effort will minimize the amount of data storage the company will have to pay for.

c. Elle Bee, a trusted employee for many years, has never taken a vacation. The owner

believes that he’s lucky that she is so committed to her job.

d. The Medicine Chest Company keeps a small petty cash fund to handle small cash

transactions. Because no one wants to volunteer to be the custodian, the business

manager has decided that all employees should have access to the petty cash. She

figures that as long as each employee fills out a petty cash ticket, then there are

proper controls in place.

e. Due to the cost of maintaining the security cameras, Wings and More has decided

that it will remove the cameras that monitor the cash register.

f. Bryan Miller, manager of Hardware Emporium, prides himself on hiring

exceptionally skilled employees who need no training to do their jobs.

Requirements

1. Identify the missing internal control characteristics in each situation.

2. Identify the possible problem caused by each control weakness.

3. Propose a solution to each internal control problem.

To make books more accurate the company needs to hire an external auditor.

See the step by step solution

Step by Step Solution

Step 1: Definition of internal control

Internal controls are those controls that affect the internal environment of the company. Internal controls enhance the smooth working of the company.

Step 2: Missing internal control weakness

  1. In the first situation, the missing internal control is the lack of external audit.
  2. In the second situation, the missing internal control is the documentation.
  3. In the given situation, the missing internal control is vacation and job rotation.
  4. In the given situation, the missing internal control is the assignment of responsibilities.
  5. In the given situation, the missing internal control is the lack of electronic devices.
  6. In the given situation, the missing internal control is lack of training.

Step 3: Effect of weaknesses

  1. In the lack of an external audit, the company’s books are not created accurately because the external auditor is the person who tells the company about mistakes in the books.
  2. In lack of documents, the sale revenue record cannot be maintained properly. This will increase the chances of fraud by employees in the revenue.
  3. In this, no job rotation decreases the efficiency of work. If the employee does not go on vacation, this will affect his work efficiency.
  4. In this, not assigning the responsibilities cause a big problem for the company because the petty cash fund is not managed properly.
  5. In this, no camera in the workplace increases the theft cases in the company.
  6. Without job training, an employee cannot work efficiently and make many mistakes.

Step 4: Solution of weaknesses

  1. The company must hire an external auditor.
  2. The company has to make a copy and digitalize every sale revenue.
  3. In this, the company can do job rotation.
  4. In this, the company must assign the responsibility of the custodian to employees.
  5. In this, the company need to put cameras to reduce the chances of theft.
  6. The company needs to give training to new employees.

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