Cotton Company Internal Control Measures Review - Case Study Example

Cotton Company Internal Control Measures Review al Affiliation) Introduction There have been a number of corruption cases in the past which have revealed that the management of stores, is an area that has a very high probability of the occurrence of fraud and corruption. This has been due to the accessibility offered to the staff in the stores and they may be tempted to engage in fraudulent practices that may bankrupt the store for their personal benefit .In other cases the staff may result to practices that misappropriate funds and resources at their disposal. Graziano et., al suggests that, in the current times, there have been increased reports regarding instances where the staff in the store and the suppliers collude to accept short deliveries and inferior products to the store at a price. Such measures result in financial losses to the employer. It is therefore advisable to institute very strong control measures in the day to day running of the store staring from the management staff, the accounting staff, the suppliers, customers and the sales clerks to avoid business malpractices (Graziano, 2005). In this case, the store in question is called Cotton Company and retails expensive linen and clothing with a staff figure of 20 sales clerks. The owner of the store is called Zafir Diab and he has instituted a number of internal control measures in the store to prevent theft and loss of his inventory and further investigation of his store reveals that he still needs to further institute other measures firmly secure his assets even further. Internal control measures of sales Every sales clerk in the store has an individual sales book that is pre numbered. The sales book is not perforated but contains multicolored sales slips that are attached in triplicate copies, the essence of the three copies is to foster reconciliation later on between the individual sales receipts and the general ledger to find errors that may either prove fraudulent or negligence on the part of the sales attendant or accounting staff. According to Cutland, the position of the cash register is strategic for the purpose of monitoring the activities of the sales clerks inside the store and for observing customers as they enter the front door. In that position, the cashier, who is also the store manager, may raise an alarm if he perceives that persons entering the shop are intruders (Cutland, 1983). The recording of the sales transactions is done in the salesclerk’s sales book. By doing so, it prevents the risk of loss of property through non-recording. In the account books it becomes easier to ascertain that a certain commodity was sold and from that information, the management can determine the demand of the product in particular periods and be able to establish a trend which is used to determine its supply. There is supervision of duties as evidenced by the fact that after a sale has been recorded by the sales clerk, he forwards two copies to the cashier who confirms the amount paid by the customer and the description of the invoice. Therefore, any discrepancies can be sorted out. Internal control measures for cash receipts In the store, before a customer can be receive his cash receipt, the supervisor at the store must match the description of the clothing contained in the invoice to the price on the sales tag. The supervisor also counter checks the calculations of the sales clerk. The measure is for ensuring that the customer and the sales clerk do not collude in order to defraud the company. After the supervisor is satisfied with the sales clerk, he approves the sale and the sale is entered in the cash register. Media argues that, all cash deposits must be centralized in order to avoid confusion and defrauding cases. In the event that a customer has complaints later on, it is easier for him/her to identify where the sale point was for rectification (Media, 2011). After validation of sale by the supervisor via the cash register, the customer is issued with a cash receipt. Thomas suggests that, the cash receipt serves as a reference point for tax purposes and for proof of the transaction in the store (Thomas, 2008). The sales clerks give their books to the supervisor at the end of the day where the supervisor compares the totals from the sales books of the clerks to those of the cash register tape. This is necessary for reconciliation purposes to prevent theft by the sale clerks. According to Peters, the segregation of duties is a necessary control measure for the purpose of identifying the party responsible in case of malpractice or negligence. Segregation of duties is also visible regarding how the accounts receivable clerk has his own separate duties that is different from the duties of the supervisor (Peters, 1997). Adjustment of the journal entries and entries to the general ledger are computerized in order to increase efficiency, reduce errors and minimize risk of manipulation by the supervisors. Additionally, the verification of the deposit slip for the cash receipts and the general ledger are conducted in timely fashion-after one month, to allow for rectification of irregularities and customer complaints. Possible deficiencies in the internal control system There is no segregation of duties with regards to the store manager because he holds two conflicting positions as the manager and as the operator of the cash register. It puts the company at risk of embezzlement of funds by the store manager. Additionally, he has stayed at the company for more than 15 years meaning he has intensive knowledge of the store and even if he doesn’t conspire to steal from the company, he may be used by outsiders to do so. The mail is opened by the owner’s secretary who gives correspondence to the owner and the payments to the supervisor. There is no person present when the secretary opens the mail to correspond what she says, meaning that the secretary may hide remittances and payments made via the mail. The transfer of cash from person to person is very long and there are many parties involved in the process. From the clerks in the store, the supervisor and then the store manager who dabbles as the cashier. This gives room for theft and fraud. There is no mention of surveillance cameras in the store to monitor the activities of both the customers and the staff or alarms that are placed strategically at the cashier’s station to alert the authorities when there is a crime being committed at the store. The sales clerks are given cash by the customers when they shop for inventory in the store. This may result in the clerks failing to remit all the money to the cashier. Recommendations to solve the deficiencies Ricchiute suggests that, the transfer of cash from one person to another should be as minimal because accountability may be lost in the event where cash is handled by many people and pick up/drop off log should be maintained so that a record is kept when deposits are transported and transferred from one person to another. The sales attendants should not receive cash from customers (Ricchiute, 1998). According to Suchanek, the management of the store should establish the guidelines, procedures and policies regarding the management of inventory regarding the security of the store, disposal of items of inventory and replenishment. It should also specifically identify the duties of the management such as amendment and writing off of stock, the handling of the store and pursuing inventory checks (Suchanek, 1998). Spillecke et., al is of the opinion that, there should be segregation of duties. Every person tasked with recording the receipt must not be the person who is making the deposit and every person who is independent of the duties associated with a recorder or a depositor should be the person who is tasked with deposit reconciliation in the general ledger. The management should hire an independent cashier and the store manager relieved off that duty (Spillecke, 2013). The store should have an inventory management system in the store that is computerized in order to allow the maintenance of true and fair inventory records that will facilitate supervision and control. Rouse et., al argues that, useful information could be generated such as inventory information relating to the stock balance and the validity/expiry dates of the products and search keys that could be used to identify batch of items like its batch number and additional data such as the store’s location and name of the issuing staff (Rouse, 2010). Adams et., al argues that, a radio frequency identifier equipment or bar coding system should also be installed in the store in order to enhance the control of inventory items. The physical security of the inventory should also be ensured thorough keeping inventory in an appropriately secured room using locks or restricted electronic access. Using an electronic system to monitor personalized security passes for the identification of staff trying to log in (Adams, 1997). Additional measures include instituting a CCTV system with a functional recording monitor and access to the store rooms should be restricted to the permitted staff members, who have been given personal access codes that should be securely guarded. Conclusion A variety of security measures will aid in safeguarding Cotton Company’s assets and facilitating a safer environment for the staff and especially those that deal with cash. Periodic reviews of the internal control are important so that restricted access to cash and inventory is curtailed. Ideally, if the owner Zafir Diab institutes the recommendations provided coupled with the existing strong internal measures already in place, he is supposed to have a full proof plan against theft and fraud. However, a system can never be fully secure and the management of the company needs to continually change their internal control mechanism so that they can be current in their methods to face the ever changing threat. Bragg points out that, nowadays, cyber-crime accounts for more than half of the losses attributed to businesses. Therefore, the company should aim to always update their online security mechanisms to avoid losses through hackers and the consequent disruption of business activities (Bragg, 2013). References Adams, K., & Grose, R. (1997). Internal controls & auditing. Sydney: Prentice Hall. Bragg, S. (2013). Accounting best practices (7th ed.). Hoboken, N.J.: John Wiley & Sons. Cutland, N. (1983). Internal Controls and Relaxed Controls. Journal of the London Mathematical Society, 130-140. Graziano, C., & Holtzman, M. (2005). Managements reports on internal controls. Florham Park, N.J.: FERF. Media, B. (2011). FIA - Recording Financial Transactions - FA1 Study Text. London: BPP Learning Media. Peters, W. (1997). Internal audit report: Cashiers/cash receipt controls. Alpine, Tex.: The University. Ricchiute, D. (1998). Auditing & assurance services (5e. ed.). Cincinnati, Ohio: South-Western College Pub. Rouse, R., Weirich, T., & Munter, P. (2010). New mandate: Reporting on internal controls. Journal of Corporate Accounting & Finance, 59-66. Spillecke, S., & Brettel, M. (2013). The impact of sales management controls on the entrepreneurial orientation of the sales department. European Management Journal, 410-422. Suchanek, M. (1998). Exploring the sales control function: Formal sales control practices that drive business excellence. S.l. Thomas, W. (2008). The sales managers success manual. New York: AMACOM. Read More