Discuss Accounting Internal Controls; what they are? why they exist? who regulates them? Give examples.
Identify as many internal control weaknesses as you can in this scenario, and suggest how each could be addressed. (10pts)
Emporia Middle School wants to raise money for a new sound system for its auditorium. The primary fund-raising event is a dance at which the famous disc jockey Obnoxious Ed will play classic and not-so-classic dance tunes.Tom Wickman, the music and theater instructor,has been given the responsibility for coordinating the fund-raising efforts.This is Tom's first experience with fund-raising. He decides to put the eighth-grade choir in charge of the event; he will be a relatively passive observer. Tom had 500 unnumbered tickets printed for the dance. He left the tickets in a box on his desk and told the choir students to take as many tickets as they thought they could sell for $5 each. In order to ensure that no extra tickets would be floating around, he told them to dispose of any unsold tickets.When the students received payment for the tickets, they were to bring the cash back to Tom, and he would put it in a locked box in his desk drawer. Some of the students were responsible for decorating the gymnasium for the dance. Tom gave each of them a key to the money box and told them that if they took money out to purchase materials, they should put a note in the box saying how much they took and what it was used for. After 2 weeks the money box appeared to be getting full, so Tom asked Luke Gilmor to count the money, prepare a deposit slip, and deposit the money in a bank account Tom had opened.The day of the dance, Tom wrote a check from the account to pay the DJ. Obnoxious Ed, however, said that he accepted only cash and did not give receipts. So Tom took $200 out of the cash box and gave it to Ed.At the dance Tom had Mel Harris working at the entrance to the gymnasium, collecting tickets from students and selling tickets to those who had not prepurchased them.Tom estimated that 400 students attended the dance. The following day Tom closed out the bank account, which had $250 in it, and gave that amount plus the $180 in the cash box to Principal Foran. Principal Foran seemed surprised that, after generating roughly $2,000 in sales, the dance netted only $430 in cash. Tom did not know how to respond.
An internal control is composed of a system within a system. It plays an important role in the success of the accounting system. It protects the business from abuse and fraud and ensures that the data or information received is accurate and timely and that all the regulatory requirements are met.
The five key elements of internal control are as follows:
1) Environmental control refers to the attitude of the management and employee in a given organization. Management goals and objectives will affect employee behavior and in order to maximize productivity, it is important that management must learn to encourage the employees to achieve what they want and never mind the consequence or the internal controls that goes with it. The Human Resources (HR) department is responsible for regulating the attitudes and behavior of management and employees in an organization.
2) Risk Assessment refers to identifying and analyzing the relevant risks to achieve objectives and thus form a basis on how the risks will be managed. In any business there is always business risk and management needs to estimate their importance so that they can react accordingly. It is usually management that regulates risks but employees can also take part in day to day analysis depending on the existence of the risks and dangers in the work environment.
3) Control procedures are the policies and procedures created to make sure that the directives of management are carried out, e.g., environmental controls, risk assessment, monitoring and information communication needed to take place in the internal control process. The purpose of this procedure is to give information, e.g., inadequately trained personnel, eliminate process error that greatly affect the information and communication aspect of the business. What regulate this control are the checks and the balances that assure a business the timely, honest, ...
The solution identifies and lists the internal control weaknesses of a scenario and some suggestions on how each weakness could be addressed. References included.