For the following five scenarios, identify the principles of internal control th
ID: 2574226 • Letter: F
Question
For the following five scenarios, identify the principles of internal control that is violated. Next, make a recommendation as to what the business should do to ensure adherence to principles of internal control.
1. At Stratford Iron Company, Jill and Joan alternate lunch hours. Normally Jill is the petty cash custodian, but if someone needs petty cash when Jill is at lunch, Joan fills in as custodian.
2. Nadine McDonald does all the posting of patient charges and payments at the Northampton Medical Clinic. Every night, Nadine backs up the computerized accounting system to a tape and stores the tape in a locked file at her desk.
3. Jack Mawben prides himself on hiring quality workers who require little supervision. As office manager, Jack gives his employees full discretion over their tasks and has seen no reason to perform independent reviews of their work for years.
4. Bill Clark’s manager has told him to “reduce overhead” no matter what! Bill decides to raise the deductible on the plant’s property insurance from $5,000 to $10,000. This cuts the property insurance premium in half. In a related move, he decides that bonding of the plant’s employees is really a waste of money since the company has not experienced any losses due to employee theft. Bill saves the entire amount of the bonding insurance premium by dropping the bonding insurance.
5. Catherine Young records all incoming customer cash receipts for her employer and also posts the customer payments to their discounts.
Explanation / Answer
Scenarios Principles of internal control that is violated Recommendation 1. At Stratford Iron Company, Jill and Joan alternate lunch hours. Normally Jill is the petty cash custodian, but if someone needs petty cash when Jill is at lunch, Joan fills in as custodian. Violates principle of establishing As since Jill is the custodian,Jill only must be authorised to access of the petty cash fund. Company should implement a policy of not allowing petty cash transactions during lunch hour. 2. Nadine McDonald does all the posting of patient charges and payments at the Northampton Medical Clinic. Every night, Nadine backs up the computerized accounting system to a tape and stores the tape in a locked file at her desk. Violates the principle of techological control So even though daily backup is a very good internal control, this tape needs to be taken off the premise every night. The reason why it needs to be kept off-site is just in case something happens to the building and computer. If the building and computer happen to get destroyed, then they would still have the data, and they would be able to restore it from the tape because it was being kept safe off of the premise. It's highly recommended that the company implement a policy that would store their tapes off of the premise every night. 3. Jack Mawben prides himself on hiring quality workers who require little supervision. As office manager, Jack gives his employees full discretion over their tasks and has seen no reason to perform independent reviews of their work for years. violates regular and independent review Jack really needs to implement a way to regularly and independently review his employees. One suggestion that I have is for him to hire an internal auditor or an outside consultant to be able to objectively review the internal controls and his employees' work. 4. Bill Clark’s manager has told him to “reduce overhead” no matter what! Bill decides to raise the deductible on the plant’s property insurance from $5,000 to $10,000. This cuts the property insurance premium in half. In a related move, he decides that bonding of the plant’s employees is really a waste of money since the company has not experienced any losses due to employee theft. Bill saves the entire amount of the bonding insurance premium by dropping the bonding insurance. violates the insuring of assets and bonding of key employees We don't actually have enough information to know if the company can actually afford to move to the higher deductible on the property insurance, but what we do know is that dropping the insurance for bonding the employees weakens internal controls. If the company does need to engage in cost cutting, they should do it without compromising their internal controls. The insurance for the bonding of key employees really needs to be reinstated. 5. Catherine Young records all incoming customer cash receipts for her employer and also posts the customer payments to their discounts. violates separation of duties I suggest that the company implement a policy whereby the person that's recording incoming cash receipts is not the same person that's responsible for posting the payments to the customer accounts.