Evaluating Internal ControlProcedures Consider each of the following situations.

Question

Evaluating Internal ControlProcedures

Consider each of the following situations.

A.    Sales clerks in aretail store are assigned to a specific cash register. They aregiven a cash drawer containing $100 in change at the beginning oftheir shifts. They are required to record the amount of eachpurchase in the cash register. The cash register records anidentification and price for each item purchased. Cash payments arecollected from customers and placed in the cash drawer. A copy ofthe cash register sales slip is given to the customer. At the endof the shift, the employee takes the cash drawer and cash registertape to a supervisor who counts the cash, verifies the sales, andsigns an approval form. The sales clerk also signs the form thatidentifies the amount of cash and amount of sales for theday.

B.     A ticketseller at a movie theater is issued a cash drawer with $100 inchange and a roll of renumbered tickets when the theater opens eachday. The seller collects cash from customers and issues thetickets. Each customer hands a ticket to a ticket taker who tearsthe ticket in half and gives half back to the customer. At the endof the day, the ticket seller returns the cash drawer and ticketsto a supervisor.

Required: For each situation, discuss why the proceduresare used and how they provided effective internalcontrol.

Explanation / Answer

This nothing but segregation of duties. Segregation of duties reduce the liklihood oferrors and irregularities. An individual is not to have responsibility for more than oneof the three transaction componenets , authorization , custody and recordkeeping . When the work of one employee is checked by another , and whenthe responsibility for custody of assets is separate from theresponsibility for maintaining the records relating to those assets, there isappropriate segregation of duties . This helps detect errors in a timely manner and deter improperactivities This type of internal controls should allow operationaleffeciency & effective communications. Prenumbered documents provide reasonable assurance that allinformation and transactions of value are accurately recorded andretained Segregation of duties reduce the liklihood oferrors and irregularities. An individual is not to have responsibility for more than oneof the three transaction componenets , authorization , custody and recordkeeping . When the work of one employee is checked by another , and whenthe responsibility for custody of assets is separate from theresponsibility for maintaining the records relating to those assets, there isappropriate segregation of duties . This helps detect errors in a timely manner and deter improperactivities This type of internal controls should allow operationaleffeciency & effective communications. Prenumbered documents provide reasonable assurance that allinformation and transactions of value are accurately recorded andretained

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