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    Improvements on the Principles of Internal Control

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    1. Sue Ernesto is the owner of Ernesto's Pizza. Ernesto's is operated strictly on a carryout basis. Customers pick up their orders at a counter where a clerk exchanges the pizza for cash. While at the counter, the customer can see other employees making the pizzas and the large ovens in which the pizzas are baked.

    Identify the six principles of internal control and give an example of each principle that you might observe when picking up your pizza. Note that it may not be possible to observe all the principles.

    2. Identify internal control weaknesses over cash receipts and suggest improvements.
    The following control procedures are used at the Sandwich Company for over-the-counter cash receipts.
    a) For each procedure, explain the weakness in internal control, and identify the control principle that is violated.
    b) For each weakness, suggest a change in procedure that will result in good internal control.

    i) To minimize the risk of robbery, cash in excess of $100 is stored in an unlocked attaché case in the stock room until it is deposited in the bank.

    ii) All over-the-counter receipts are registered by three clerks who use a cash register with a single cash drawer.

    iii) The company accountant makes the bank deposit and then records the day's receipts.

    iv) At the end of each day, the total receipts are counted by the cashier on duty and reconciled to the cash register total.

    v) Cashiers are experienced; they are not bonded.

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    Solution Preview

    1. Ernesto's Pizza
    1) Segregation of Duties: The worker who makes the pizza is different from the person handling cash
    2) Physical, Mechanical, and Electronic Control: A Cash Register is used in recording sales
    3) Independent Internal Verification: The clerk who delivers the pizza compares the order on the receipt to the order delivered.
    4) Documentation Procedures: Cash Register provides a tape of all sales
    5) ...

    Solution Summary

    This response discusses the principles of internal control for different companies and ways to improve processes within a company or business.