Exercise 8-3 Analyzing internal control?

Question

Exercise 8-3

Analyzing internal control

Bemis Company is a rapidly growing start-up business. Its recordkeeper, who was hired one year ago,

left town after the company’s manager discovered that a large sum of money had disappeared over

the past six months. An audit disclosed that the recordkeeper had written and signed several checks

made payable to her fiancé and then recorded the checks as salaries expense. The fiancé, who cashed

the checks but never worked for the company, left town with the recordkeeper. As a result, the company

incurred an uninsured loss of $84,000. Evaluate Bemis’s internal control system and indicate

which principles of internal control appear to have been ignored.

HELP!

Answer 1

Principles violated:

1.  Safeguard assets by requiring joint cheque signatories. The recordkeeper should not have been allowed to sign cheques singly.

2.  Separate recordkeeping and custody over assets. If she signs cheques, someone else should do the recording. This person would have realised that cheques were paid to a non-existent colleague.

3.  Insure assets and bond employees. If the co. had taken out employee fidelity insurance, it would have been able to recover the loss.

4.  Perform regular and independent reviews. If such reviews of payments had been made, the mgr would have realised the payments to a non-existent employee. In addition, a review of monthly income statements would indicate an unexplained high level of salaries.