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 the weakness in internal control                                                          Use of cash instead of checks; no prenumbered invoicesUnauthorized employees making purchasesFiling does not prevent a bill from being paid more than onceChecks are not stored in a secure areaThe approval and payment of bills is done by the same individualThe bank reconciliation is not independently prepared		select the internal control principle                                                          Establishment of responsibilitySegregation of dutiesIndependent internal verificationDocumentation proceduresPhysical controlsHuman resource controls
2.		The store manager personally approves all payments before she signs and issues checks.		select the weakness in internal control                                                          Filing does not prevent a bill from being paid more than onceChecks are not stored in a secure areaUnauthorized employees making purchasesUse of cash instead of checks; no prenumbered invoicesThe bank reconciliation is not independently preparedThe approval and payment of bills is done by the same individual		select the internal control principle                                                          Documentation proceduresSegregation of dutiesIndependent internal verificationHuman resource controlsEstablishment of responsibilityPhysical 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 the weakness in internal control                                                          Unauthorized employees making purchasesThe approval and payment of bills is done by the same individualFiling does not prevent a bill from being paid more than onceChecks are not stored in a secure areaThe bank reconciliation is not independently prepared		select the internal control principle                                                          Independent internal verificationHuman resource controlsEstablishment of responsibilityPhysical controlsDocumentation proceduresSegregation of duties
				select the weakness in internal control                                                          Checks are not stored in a secure areaThe bank reconciliation is not independently preparedUse of cash instead of checks; no prenumbered invoicesFiling does not prevent a bill from being paid more than onceThe approval and payment of bills is done by the same individual		select the internal control principle                                                          Segregation of dutiesIndependent internal verificationPhysical controlsEstablishment of responsibilityDocumentation proceduresHuman resource controls
4.		After payment, bills are “filed” in a paid invoice folder.		select the weakness in internal control                                                          The bank reconciliation is not independently preparedChecks are not stored in a secure areaFiling does not prevent a bill from being paid more than onceThe approval and payment of bills is done by the same individualUse of cash instead of checks; no prenumbered invoicesUnauthorized employees making purchases		select the internal control principle                                                          Physical controlsHuman resource controlsSegregation of dutiesDocumentation proceduresEstablishment of responsibilityIndependent internal verification
5.		The company accountant prepares the bank reconciliation and reports any discrepancies to the owner.

Answer 1

	Procedure	Weakness	Principle Violated
1	Each week, 100 company checks are left in an unmarked envelope on a shelf behind the cash register.	Checks are not stored in a secure area	Physical controls
2	The store manager personally approves all payments before she signs and issues checks.	The approval and payment of bills is done by the same individual.	Segregation of duties.
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.	Unauthorized employees making purchases	Establishment of responsibility
		Use of cash instead of checks; no prenumbered invoices	Documentation procedures
4	After payment, bills are “filed” in a paid invoice folder.	Filing does not prevent a bill from being paid more than once	Documentation procedures
5	The company accountant prepares the bank reconciliation and reports any discrepancies to the owner.	The bank reconciliation is not independently prepared.	Independent internal verification.