As A New Employee At Canyon Rental, An Outdoor Outfitters

As A New Employee At Canyon Rental An Outdoor Outfitters And Supply S

As a new employee at Canyon Rental, an outdoor outfitters and supply shop, your boss has asked you to review the internal control system within the store. He needs this assessment to facilitate a loan application for expansion and to prepare for an upcoming audit. The auditor requires information about control procedures and documentation, but your boss is unfamiliar with these concepts. Therefore, you are tasked with analyzing the current system and providing a memo with your observations and recommendations by the end of the week.

Through interviews and observation, you notice several issues: purchase orders and sales invoices are not pre-numbered because of cost concerns; sales are entered into records at the end of the day rather than at the point of sale; sales returns are granted at the clerk’s discretion; the purchasing manager both orders merchandise and approves payments; the bookkeeper has not taken vacation in three years; and the owner signs checks only on recommendations and arrives at the store twice a week to review and sign checks, which contributes to overwhelmed bookkeeping.

This memo should include a summary of the elements of an effective internal control system, an evaluation of each of your observations, identification of weaknesses, and suggestions for improvement. The overall goal is to provide a comprehensive understanding of internal controls and how they can be strengthened within the store to safeguard assets, ensure accurate financial reporting, and promote efficient operations.

Paper For Above instruction

Introduction

An effective internal control system is essential for any business to safeguard its assets, ensure the accuracy of financial records, and promote operational efficiency. Internal controls are policies and procedures established to provide reasonable assurance regarding the achievement of objectives related to financial reliability, compliance with laws and regulations, and effective and efficient operations. In the context of Canyon Rental, understanding its current control environment, identifying weaknesses, and recommending improvements are vital for supporting the company’s expansion plans and ensuring the integrity of its financial statements for the impending audit.

Elements of an Effective Internal Control System

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides a widely accepted framework for internal controls, comprising five essential components: control environment, risk assessment, control activities, information and communication, and monitoring. Each component plays a crucial role in establishing a robust control system.

1. Control Environment: Establishes the foundation by setting the tone at the top, emphasizing integrity, ethical values, and competence.

2. Risk Assessment: Identifies and analyzes risks relevant to achieving objectives, allowing management to mitigate potential threats.

3. Control Activities: Specific policies and procedures designed to mitigate risks, including authorization, segregation of duties, documentation, and physical controls.

4. Information and Communication: Ensuring relevant information flows appropriately up, down, and across the organization.

5. Monitoring: Ongoing or separate evaluations to ensure controls are functioning as intended and deficiencies are addressed promptly.

Implementing these elements helps create a comprehensive control system that minimizes risks and enhances operational reliability—an imperative for businesses seeking financial credibility and growth.

Evaluation of Observations and Weaknesses

Your observations reveal several weaknesses in Canyon Rental’s internal controls:

1. Unnumbered Purchase Orders and Sales Invoices: The decision not to pre-number documents compromises the ability to track transactions effectively. This lapse can lead to errors, fraud, or lost documentation. A remedy would be to implement pre-numbered forms or electronic systems that automatically assign unique identifiers, facilitating proper record-keeping and audit trails.

2. End-of-Day Data Entry and Cash Handling: Recording sales retrospectively and manually preparing deposits increases the risk of errors and theft. To improve control, sales should be recorded at the point of sale, with daily reconciliations and cash counting conducted by independent personnel. Utilizing Point of Sale (POS) systems can automate this process and enhance accuracy.

3. Sales Returns Discretion: Allowing the sales clerk to grant returns at her discretion without oversight can lead to improper or fraudulent refunds. Instituting formal authorization procedures, such as approval limits and supervisor reviews, strengthens controls over returns.

4. Dual Role of Purchasing Manager: The same individual ordering merchandise and authorizing payments reduces segregation of duties, increasing opportunities for misappropriation. Segregating these responsibilities—having a designated purchasing agent and separate approval authority—helps prevent fraud.

5. Bookkeeper’s Lack of Vacation: The absence of recurring absences hampers the ability to detect irregularities. Encouraging periodic vacations or cross-training staff provides oversight and reduces the risk of undetected errors or fraud.

6. Owner’s Check Signing Procedure: The owner signing only on selected checks and twice weekly review process delays oversight, potentially allowing unauthorized or fraudulent transactions. Establishing a system where checks are signed by multiple authorized officials and implementing electronic approvals can facilitate timely review and accountability.

Overall, these weaknesses highlight the need for formalized procedures, segregation of duties, and automation to reinforce control procedures. Implementing such measures can significantly improve the reliability of financial data and asset protection.

Recommendations for Strengthening Internal Controls

Based on the evaluation, the following recommendations are proposed:

- Implement Pre-Numbered Documents or Electronic Records: Transition to pre-numbered purchase orders and sales invoices or adopt electronic systems that generate unique transaction identifiers, ensuring proper tracking and auditability.

- Improve Cash Handling and Recording: Require sales to be recorded immediately at the point of sale, with cashier control and daily reconciliations. Use POS systems to automate sales and inventory tracking.

- Establish Formal Authorization Policies: Develop clear procedures for sales returns, requiring supervisor approval for refunds beyond a certain amount, and document all transactions.

- Segregate Duties: Separate responsibilities among purchasing, approval, and payment processing functions to mitigate risk. For example, assign purchasing to one individual, with payments approved by others.

- Cross-Train Employees and Enforce Vacations: Regularly train employees to ensure coverage and detect irregularities. Encourage staff vacations and periodic audits of roles and responsibilities.

- Automate and Strengthen Check Approval Processes: Utilize electronic payment systems where possible, with multiple signatures or approvals, and establish a review process that does not rely solely on the owner’s manual intervention.

- Regular Monitoring and Internal Audits: Conduct periodic internal reviews to evaluate compliance with control procedures and address deficiencies promptly.

Conclusion

A comprehensive internal control system is vital for Canyon Rental’s success, especially as it seeks expansion and faces regulatory scrutiny through audits. By establishing clear policies, segregating duties, automating processes, and fostering a culture of integrity, the store can mitigate risks related to theft, fraud, and errors. Implementing these recommendations will not only enhance the accuracy of financial records but also strengthen stakeholder confidence and support sustainable growth.

References

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