The following control procedures are used in Bunny’s Boutique Shoppe for cash disbursements. For each procedure, explain the weakness in internal control and identify the internal control principle that is violated. Procedures:

a. Each week, 100 company checks are left in an unmarked envelope on a shelf behind the cash register.
b. The store manager personally approves all payments before she signs and issues checks.
c. The store purchases used goods for resale from people that bring items to the store. Since that can occur anytime that the store is open, all employees are authorized to purchase goods for resale by disbursing cash from the register.
The purchase is documented by having the store employee write on a piece of paper a description of the item that was purchased and the amount that was paid. The employee then signs the paper and puts it in the register.
d. After payment, bills are "filed" in a paid invoice folder.
e. The company accountant prepares the bank reconciliation and reports any discrepancies to the owner.

a. Principle Violated - Physical Controls

Weakness - The cheques are not stored in a secure area and so can be misused if people who find it have ill minds about it.

b. Principle Violated - Segregation of Duty

Weakness - The approval and payment of bills is done by the same individual. This can give rise to the store manager approving fraudulent payments and then authorizing it herself.

c. Principles Violated - .Establishment of responsibility; Documentation procedures

Weakness - Unauthorized employees making purchases.

Not all employees should have the power to approve purchases for resale.

Weakness - Use of cash instead of checks; no prenumbered invoices.

Checks should be used to disburse the cash so that payment may be cancelled if need be. Also prenumbered invoices should be used so that purchases can be tracked.

d. Principle Violated - Documentation Procedures

Weakness - Filing does not prevent a bill from being paid more than once

Just because the bills are filed does not mean that they won't be paid more than once. A more sophisticated method is needed that reflects when a bill has been paid to prevent it being paid for again.

e. Principle Violated - Independent Internal Verification

Weakness - The bank reconciliation is not independently prepared

The bank reconciliation should not be prepared by the same person who has been in charge of the accounting entries in the company. Someone else should do it to ensure that no fraudulent transactions were recorded.

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