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    Analyzing violations to internal control principles

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    Analyzing internal control

    When responding to the cases in 8-1A, be sure to think critically about each case. Identify the principles of internal control that has been violated, and give an explanation of why you think that principle has been violated. Identify the consequences of the actions described in the cases. Make a recommendation for what the business should do to ensure adherence to principles of internal control.

    For each of these five separate cases, identify the principle of internal control that is violated.

    Recommend what the business should do to ensure adherence to principles of internal control.

    1. Heather Flatt records all incoming customer cash receipts for her employer and posts the customer payments to their respective accounts.

    2. At Netco Company, Jeff and Jose alternate lunch hours. Jeff is the petty cash custodian, but if someone needs petty cash when he is at lunch, Jose fills in as custodian.

    3. Nadine Cox posts all patient charges and payments at the P-Town Medical Clinic. Each night Nadine backs up the computerized accounting system to a tape and stores the tape in a locked file at her desk.

    4. Barto Sayles prides himself on hiring quality workers who require little supervision. As office manager, Barto gives his employees full discretion over their tasks and for years has seen no reason to perform independent reviews of their work.

    5. Desi West's manager has told her to reduce costs. Desi 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, she decides that bonding the plant's employees is a waste of money since the company has not experienced any losses due to employee theft. Desi saves the entire amount of the bonding insurance premium by dropping the bonding insurance.

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    Solution Preview

    1. Segregation of duties has been violated. There should be two people involved in the functions which would create a system of checks and balances. Fraud could be minimized, and only collusion would destroy the system of controls.

    2. Physical control and Segregation of duties have been violated. The responsibility for the control over petty cash should be assigned to only one person. There could no 'he did it, not me' statement. Segregation assigns responsibility for an activity. For lunch time coverage, there could be two petty cash funds, each assigned to a single person.

    3. Segregation of duties, adequate documents and records and Physical controls have been compromised. Clearly charges should be separated from payments because fraud is too easy. Adequate documents could suggest that the tape backup be stored off site. It would be too easy to destroy the computer system and have no backup tape that works. I've seen it done. Physical control has to do with protection of assets and the computer system ...

    Solution Summary

    The 600 word, cited solution gives a good explanation of the violation of internal control principles for each of the first cases. Beyond the five is a more generic list of common types of internal control problems encountered in business with the procedural changes that should be made.

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