The following control procedures are used in Kelton Company for over-the-counter cash receipts. (a) For each procedure, explain the weakness in internal control and identify the control principle that is violated.
Kelton Company employs several control procedures to manage over-the-counter cash receipts. Analyzing these procedures reveals inherent weaknesses in internal controls and the specific control principles they violate, which could compromise the company's cash handling integrity.
1. Store managers interview applicants for cashier jobs based on perceived honesty and trustworthiness. This procedure presents a significant weakness as it relies heavily on subjective judgment rather than objective assessments or verifiable credentials. Interviewing store managers, who may lack specialized training in personnel selection or internal controls, can lead to hiring individuals based on personal bias or incomplete information. Such a process violates the control principle of Segregation of Duties because it does not involve independent verification of candidates’ backgrounds and trustworthiness. Without proper background checks and formal screening processes, there is an increased risk of employing dishonest personnel who could misappropriate cash.
2. All over-the-counter receipts are registered by three clerks who share a cash register with a single cash drawer.
This procedure violates the principle of Segregation of Duties and creates a risk of theft or errors. Sharing a single cash drawer among three clerks complicates accountability, as it becomes difficult to determine which clerk is responsible for any discrepancies. Additionally, the lack of individual registers or logs diminishes transactional transparency, making it easier for theft, misappropriation, or errors to go unnoticed. Proper controls would involve separate cash registers or at least individual cashier logs, enabling accountability for each clerk’s transactions.
3. Cash exceeding $100 is stored in an unlocked attaché case in the stockroom until deposited in the bank to minimize robbery risk.
This practice weakens internal controls significantly because storing large amounts of cash in an unsecured location exposes the company to theft and loss. It violates the control principle of Physical Controls
because the cash is not secured in a locked safe or cash vault. The lack of proper physical safeguards makes it susceptible to theft by employees or outside intruders, undermining the company’s efforts to protect its assets.
4. At the end of each day, the cashier on duty counts the total receipts and reconciles them with the cash register total.
This process upholds the principle of Reconciliation
; however, it may be weak if not performed with oversight or if the cashier has collusion with others. The procedure helps detect discrepancies, but without independent verification or supervisory review, it remains vulnerable to manipulation. To strengthen this control, management should periodically perform surprise cash counts or have a supervisor review the reconciliation process.
5. The company accountant makes the bank deposit and then records the day’s receipts.
This procedure violates the principles of Separation of Duties and Authorization
. By both making the deposit and recording the receipts, the accountant has the opportunity to conceal thefts or misappropriate funds. An effective internal control would involve an independent employee responsible solely for deposits, with the recording of receipts performed separately to prevent collusion and ensure accountability.
Conclusion
In summary, Kelton Company's cash receipt procedures have several weaknesses primarily related to inadequate segregation of duties, insufficient physical controls, and lack of independent verification.
Addressing these issues by implementing stricter segregation of responsibilities, securing cash, and enhancing oversight would significantly improve the internal control environment and safeguard the company’s assets.
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