As A New Employee At Canyon Rental And 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 is seeking a loan for expansion and requires an audit of his books. The auditor inquired about control procedures and documentation; however, your boss is unfamiliar with these concepts. He has requested that you analyze the system and prepare a memo with your observations and recommendations by the end of the week.

Through interviews and observation, you have identified several issues:

• Purchase orders and sales invoices are not pre-numbered, primarily due to the higher costs of printing forms.
• The sales clerk records sales at the end of each day, prepares the deposit, and delivers it to the bank.
• The sales clerk, a trusted and long-term employee, authorizes sales returns at her discretion.
• The purchasing manager is responsible for both ordering merchandise and approving the related payments.
• Betty Gamble, the bookkeeper, has not taken a vacation in three years, indicating limited segregation of duties.
• Checks are brought to the owner twice weekly for signature. The owner only signs checks on which he stamps his signature, which contributes to oversight deficiencies.

Paper For Above instruction

This memo aims to evaluate the current internal control system at Canyon Rental and to recommend improvements to enhance financial accuracy, safeguard assets, and ensure proper documentation. An effective internal control system comprises several elements, including control environment, risk assessment, control activities, information and communication, and monitoring. These elements work collectively to prevent errors and fraud, promote operational efficiency, and comply with legal requirements.

Control Environment: This forms the foundation of internal controls, encompassing the company's ethical values, management philosophy, and operational attitude. A strong control environment fosters discipline and promotes adherence to policies among employees.

Risk Assessment: The process of identifying vulnerabilities to financial misstatements or misappropriation of assets. Regular risk assessment helps tailor control procedures accordingly and adapt to changing operational conditions.

Control Activities: These are specific policies and procedures such as authorization, segregation of duties, reconciliations, and documentation controls used to mitigate risks. Implementation of these activities is essential for effective internal control.

Information and Communication: Incorporating timely and relevant information flow between various levels of the organization ensures managers and staff can make informed decisions and track operational activities effectively.

Monitoring: Continuous oversight and periodic evaluations of control processes are vital to detect and correct deficiencies promptly.

Evaluation of Observations and Recommendations

Regarding the absence of pre-numbered purchase orders and sales invoices, these documents serve as crucial control tools that establish an audit trail. Without numbering, tracking and verifying transactions become difficult, increasing the risk of theft, errors, or duplicate entries. To improve, the store should implement cost-effective manual numbering systems or invest in affordable printing solutions to assign sequential numbers to each document, thus enhancing traceability.

The practice of recording sales only at day's end, followed by depositing cash and recording transactions without real-time oversight, exposes the store to cash misappropriation and recording inaccuracies. Implementing a real-time cash register system or dedicated register tapes would help record sales immediately, reducing errors and theft. Daily reconciliation of cash receipts with sales records is also recommended.

The discretion given to the sales clerk for handling sales returns presents a significant risk of unauthorized returns or theft. To mitigate this, a formal authorization process should be established, requiring managerial approval for returns beyond a certain monetary threshold. Additionally, periodic review of returned items and sales records can detect irregularities.

Having the purchasing manager responsible for both ordering and approving payments creates a segregation of duties concern, which can lead to conflicts of interest or fraudulent activity. To strengthen controls, the store should assign an independent person to approve payments, separate from the ordering process. Segregating duties ensures that no single individual has control over all aspects of a transaction.

The bookkeeper’s lack of vacation suggests limited personnel rotation and supervisory oversight, which could conceal errors or fraudulent activities. Encouraging periodic staff rotation and ensuring external or independent review of financial reports can improve oversight and reduce risks associated with concentrated knowledge.

The owner's practice of signing checks only on specified days and signing only checks with his stamp hampers complete oversight of disbursements. To enhance control, the store should adopt electronic or multiparty signing procedures, where checks must be reviewed and signed by at least one other person besides the owner. This process ensures checks are authorized appropriately and records are maintained for audit purposes.

Conclusion and Summary Recommendations

In conclusion, establishing a comprehensive internal control system at Canyon Rental involves strengthening document control, segregation of duties, and oversight mechanisms. Implementing pre-numbered documents, real-time cash monitoring, formal authorization procedures, segregation of duties, and enhanced disbursement controls will significantly improve the store’s financial integrity and operational efficiency. Regular staff rotation and independent oversight of financial processes will further foster a culture of accountability. These improvements not only prepare the business for a successful audit but also support its future growth prospects through sound financial management.

References

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