As A New Employee At Canyon Rental And Outdoor Outfit 471268

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 analyze the internal control system within the store. He is seeking a loan for expansion and requires an audit of his financial records. The auditor has inquired about the store's control procedures and documentation. Your boss is unfamiliar with these concepts and has tasked you with understanding the control system, providing observations, and offering recommendations in a memo due by the end of the week.

Through interviews and observation, you note several weaknesses: purchase orders and sales invoices are not pre-numbered; sales are entered into the accounting records at daily end, with deposits prepared and delivered to the bank; the sales clerk, a trusted long-term employee, grants sales returns at her discretion; the purchasing manager handles ordering and approval of payments; the bookkeeper has not taken a vacation in three years; checks are signed by the owner only twice a week, with the owner reviewing only signed checks due to workload.

Paper For Above instruction

Effective internal control systems are essential for ensuring the integrity of an organization’s financial reporting, safeguarding assets, and promoting operational efficiency. A well-designed internal control system comprises various elements that collectively mitigate risks, prevent fraud, and ensure compliance with policies and regulations. These elements include the control environment, risk assessment, control activities, information and communication, and monitoring activities.

Control Environment

The control environment sets the tone at the top, establishing the foundation for all other components. It encompasses the organization's integrity, ethical values, competence of personnel, management's philosophy, and commitment to internal controls. A robust control environment encourages a culture of accountability and transparency. At Canyon Rental, the long-term trust placed in a sales clerk who grants returns at her discretion suggests a lax control environment, lacking clear policies and oversight.

Risk Assessment

This involves identifying and analyzing risks relevant to achieving organizational objectives. Proper risk assessment enables the organization to implement effective controls tailored to specific vulnerabilities. The lack of pre-numbered purchase orders and sales invoices indicates a failure to assess risks related to recordkeeping and fraud prevention, thereby increasing the likelihood of errors or fraudulent activities going undetected.

Control Activities

These include policies and procedures that help ensure management directives are carried out. Segregation of duties, authorization processes, physical controls, and reconciliations are critical controls. At Canyon Rental, the practice of entrusting the sales clerk with grants of returns without oversight, along with the purchase manager’s dual role of ordering and approving payments, highlights significant control deficiencies. To mitigate these risks, segregation of duties should be enforced, and formal approval processes should be established.

Information and Communication

Effective communication ensures that pertinent information flows appropriately within the organization, enabling personnel to perform their controls reliably. The current system's reliance on end-of-day entry and minimal oversight hampers timely detection of discrepancies. Implementing real-time recording and documentation standards would improve accuracy and accountability.

Monitoring Activities

Organizations must continuously monitor their controls to identify and address weaknesses. The absence of internal audits or regular reviews at Canyon Rental limits the ability to detect errors or fraud promptly. Regular internal audits and management reviews should be adopted to strengthen oversight and compliance.

Observations and Recommendations:

• Purchase Orders and Sales Invoices not pre-numbered: While cost-saving, this practice undermines traceability and control over document completion. Transitioning to pre-numbered forms or electronic systems would enhance accountability and facilitate audit trails.
• Sales Recording and Deposits: Entering sales at day-end and handling deposits personally increases the risk of misappropriation or errors. Implementing point-of-sale systems with real-time recording and segregating duties—such as assigning cash handling and recordkeeping to different employees—would improve security.
• Sales Returns: Allowing the sales clerk discretion without oversight presents the risk of abuse. Establishing formal return policies and requiring supervisory approval can mitigate this risk.
• Purchasing and Payment Approval: The dual role of the purchasing manager could lead to unauthorized or fraudulent payments. Introducing independent approval and dual signatures for payments would reinforce controls.
• Bookkeeper’s Lack of Vacation: No vacation policy limits the opportunity for undetected errors or fraud. Enforcing mandatory vacations and cross-training staff can provide additional oversight and detect irregularities.
• Check Signing Process: The owner signing only twice a week and reviewing only signed checks delays detection of unauthorized disbursements. Implementing dual signatures, weekly review of all checks, and electronic banking controls can enhance oversight and reduce fraud risk.

Conclusion

In summary, Canyon Rental's current internal control system exhibits significant weaknesses that could expose the business to errors and fraud. Strengthening the control environment through clear policies, segregating duties, implementing technology solutions, and establishing routine monitoring procedures are essential steps. These improvements will not only prepare the business for a successful audit but also support sustainable growth through reliable financial management and asset protection.

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