What is the principle of internal control that is violated?

Question

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.

Answer 1

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

Principle violated (PV) : Separate recordkeeping and custody over assets

If Heather handles receipts from customers, someone else should do the recording.

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.

PV : Establish responsibilities. Divide responsibility for related transactions.

Set a rule that there will be no petty cash payments when Jeff is at lunch. If this is not possible, Jeff and Jose should count the cash together when Jeff goes for lunch and when he returns, so that it can be established who paid what out and if the books balance properly during Jose’s shift.

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.

PV : Safeguard assets.

It defeats the purpose if the computer and back-up tape are in the same room. In the case of a fire, both would get caught. The back-up should preferable be in another location.

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.

PV : Perform regular and independent reviews.

Barto should perform regular and unannounced reviews to ensure that his instructions are being followed and controls are being adhered to. He should also bond employees.

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.

PV : Establish responsibilities. Bond employees.

Desi should not decide by herself to raise the deductible. She should just submit the proposal to do so to her manager and let management decide. In addition, she should reinstate the bond on the employees.