E7-4 The following control procedures are used in Centennial Bay General Merchan
ID: 2515455 • Letter: E
Question
E7-4 The following control procedures are used in Centennial Bay General Merchandise for cash payments. 1. Company cheques are not pre-numbered and are kept in an unlocked file cabinet in the controller's office. 2. Cheques must be signed by the controller. 3. The purchasing agent verifies that the goods have been received, verifies the accuracy of the invoice, and autho- rizes the controller to issue a cheque for the purchase 4. After the controller prepares and signs the cheque, she stamps the invoice "paid" and files it. She then records the cheque in the journal. 5. The controller prepares the bank reconciliation on a monthly basis and gives it to the company owner. As the company owner trusts the controller, he doesn't bother checking the bank reconciliations. 6. Background checks are not conducted on personnel hired for senior positions such as the purchasing agent or controller 7. The company owner is impressed with how hard the purchasing agent works. He hasn't taken a vacation in two years. Instructions (a) For each procedure, explain the weaknesses in internal control, and identify the control activity that is violated. (b) For each weakness, suggest a change in procedure that will result in good internal control.Explanation / Answer
S.No Weakness in Internal Control Violated Activity Suggestion 1 Cheques are not Pre-numbered, and kept in unlocked cabinet Cheques are kept unlocked in the Controller's office. Instruments like Cheques should be serially numbered, and kept under the lock at a secure place. 2 Cheques signed by the Controller. No Cross Verification of activities done by another employee. Cheques should be signed by an officer other than the one who keeps them. 3 One person handles all the activites involved in the Purchasing Process. Division of Work does not exist. The one who verifies goods and processes invoce should not have the authority to authorize payments. 4 The person who keeps check on receipt of goods is maintaining books. Division of work does not exist. The processing of inventory and journalising the receipt shouldn't be under the control of one person. 5 The owner doesn't check the Bank Reconciliations. Since he'll be accountable for submissions made by the Controller, he doesn't understand his responsibility. Any difference in financials should be made up by the person responsible, at personal expense. 6 No background checks for hiring senior staff Improper Recruitment Process. Validity and Genuiness of staff hasn't been sufficiently obtained. Proper Background check, directly or through some agency, should be made before hiring, irrespective of the position offered in the company. 7 Purchasing agent is very willing to work without any financial or non-financial motivation that no leave is taken in 2 years. Rotation of work couldn't take place. Employees should be granted leaves once in a while so any odds can be found in their absence.
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