Question

The following control procedures are used in Bunny’s Boutique Shoppe for cash disbursements.

(a) For each procedure, explain the weakness in internal control and identify the internal control principle that is violated.

Procedure				Weakness		Principle Violated
1.		Each week, 100 company checks are left in an unmarked envelope on a shelf behind the cash register.		select a weaknessselect a weaknessFiling does not prevent a bill from being paid more than onceThe approval and payment of bills is done by the same individualUnauthorized employees making purchasesUse of cash instead of checks; no prenumbered invoicesChecks are not stored in a secure areaThe bank reconciliation is not independently prepared Checks are not stored in a secure areaThe approval and payment of bills is done by the same individualUnauthorized employees making purchasesFiling does not prevent a bill from being paid more than onceThe bank reconciliation is not independently preparedUse of cash instead of checks; no prenumbered invoices		select a principle violatedselect a principle violatedPhysical controlsIndependent internal verificationHuman resource controlsEstablishment of responsibilityDocumentation proceduresSegregation of duties Physical controlsSegregation of dutiesDocumentation proceduresIndependent internal verificationEstablishment of responsibilityHuman resource controls
2.		The store manager personally approves all payments before she signs and issues checks.		select a weaknessselect a weaknessThe bank reconciliation is not independently preparedChecks are not stored in a secure areaUse of cash instead of checks; no prenumbered invoicesUnauthorized employees making purchasesThe approval and payment of bills is done by the same individualFiling does not prevent a bill from being paid more than once Checks are not stored in a secure areaThe approval and payment of bills is done by the same individualUnauthorized employees making purchasesFiling does not prevent a bill from being paid more than onceThe bank reconciliation is not independently preparedUse of cash instead of checks; no prenumbered invoices		select a principle violatedselect a principle violatedSegregation of dutiesHuman resource controlsPhysical controlsDocumentation proceduresEstablishment of responsibilityIndependent internal verification Physical controlsSegregation of dutiesDocumentation proceduresIndependent internal verificationEstablishment of responsibilityHuman resource controls
3.		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.		select a weaknessselect a weaknessFiling does not prevent a bill from being paid more than onceUnauthorized employees making purchasesThe approval and payment of bills is done by the same individualChecks are not stored in a secure areaThe bank reconciliation is not independently prepared Checks are not stored in a secure areaThe approval and payment of bills is done by the same individualUnauthorized employees making purchasesFiling does not prevent a bill from being paid more than onceThe bank reconciliation is not independently prepared		select a principle violatedselect a principle violatedDocumentation proceduresSegregation of dutiesIndependent internal verificationEstablishment of responsibilityPhysical controlsHuman resource controls Physical controlsSegregation of dutiesDocumentation proceduresIndependent internal verificationEstablishment of responsibilityHuman resource controls
				select a weaknessselect a weaknessFiling does not prevent a bill from being paid more than onceThe bank reconciliation is not independently preparedThe approval and payment of bills is done by the same individualUse of cash instead of checks; no prenumbered invoicesChecks are not stored in a secure area Checks are not stored in a secure areaThe approval and payment of bills is done by the same individualFiling does not prevent a bill from being paid more than onceThe bank reconciliation is not independently preparedUse of cash instead of checks; no prenumbered invoices		select a principle violatedselect a principle violatedIndependent internal verificationDocumentation proceduresSegregation of dutiesHuman resource controlsPhysical controlsEstablishment of responsibility Physical controlsSegregation of dutiesDocumentation proceduresIndependent internal verificationEstablishment of responsibilityHuman resource controls
4.		After payment, bills are “filed” in a paid invoice folder.		select a weaknessselect a weaknessFiling does not prevent a bill from being paid more than onceUse of cash instead of checks; no prenumbered invoicesThe bank reconciliation is not independently preparedThe approval and payment of bills is done by the same individualUnauthorized employees making purchasesChecks are not stored in a secure area Checks are not stored in a secure areaThe approval and payment of bills is done by the same individualUnauthorized employees making purchasesFiling does not prevent a bill from being paid more than onceThe bank reconciliation is not independently preparedUse of cash instead of checks; no prenumbered invoices		select a principle violatedselect a principle violatedSegregation of dutiesIndependent internal verificationPhysical controlsHuman resource controlsEstablishment of responsibilityDocumentation procedures Physical controlsSegregation of dutiesDocumentation proceduresIndependent internal verificationEstablishment of responsibilityHuman resource controls
5.		The company accountant prepares the bank reconciliation and reports any discrepancies to the owner.		select a weaknessselect a weaknessThe approval and payment of bills is done by the same individualThe bank reconciliation is not independently preparedUse of cash instead of checks; no prenumbered invoicesChecks are not stored in a secure areaFiling does not prevent a bill from being paid more than onceUnauthorized employees making purchases Checks are not stored in a secure areaThe approval and payment of bills is done by the same individualUnauthorized employees making purchasesFiling does not prevent a bill from being paid more than onceThe bank reconciliation is not independently preparedUse of cash instead of checks; no prenumbered invoices		select a principle violatedselect a principle violatedPhysical controlsEstablishment of responsibilityHuman resource controlsSegregation of dutiesDocumentation proceduresIndependent internal verification Physical controlsSegregation of dutiesDocumentation proceduresIndependent internal verificationEstablishment of responsibilityHuman resource controls

Answer 1

	Weakness	Principle Violated
1	Checks are not stored in a secure area	Physical controls
2	The approval and payment of bills is done by the same individual.	Segregation of Duties.
3	Unauthorized employees making purchases	Establishment of responsibility
	Use of cash instead of checks; no prenumbered invoices	Documentation procedures
4	Filing does not prevent a bill from being paid more than once	Documentation procedures
5	The bank reconciliation is not independently prepared.	Independent Internal Verification.
	Note: For number 3, there are two weaknesses and two principles violated