Need Tomorrow 1pm Eastern As A New Employee At Canyon Rental

Need Tomorrow 1pm Easternas A New Employee At Canyon Rental

As a new employee at Canyon rental, an outdoor outfitters and supply shop, your boss has asked you to look at the internal control system within the store. He is seeking a loan for expansion and must have his books audited. The auditor asked about his control procedures and documentation. He has no idea what the auditor is talking about. Your boss has asked you to do what you need to understand the system and has asked for a memo with your observations and recommendations by the end of the week.

Through interviews and observation you notice the following: Purchase orders, and sales invoices are not pre-numbered due to the higher cost of printing the forms. To save time, the sales clerk enters the sales at the end of the day into the accounting records, prepares the deposit, and delivers it to the bank. The sales clerk, a trusted and long-term employee, grants sales returns at her discretion. The purchasing manager both orders merchandise and approves the payment for the order. Betty Gamble, the bookkeeper, has not taken a vacation in three years.

Checks are brought to the owner twice a week for signing. He is overwhelmed by all of the paperwork and has asked for the checks only on which he stamps his signature. In your memo, give a summary of the elements of an effective internal control system. Comment on each of your observations and if there is a weakness, provide a solution. Your memo should be 2-3 pages.

Paper For Above instruction

Introduction

Internal control systems are vital for ensuring the accuracy, integrity, and security of a company's financial and operational processes. An effective internal control system helps prevent fraud, misappropriation, and operational inefficiencies, thereby safeguarding the assets of an organization and ensuring compliance with relevant laws and regulations. This memo evaluates the current control environment at Canyon Rental, identifying strengths, weaknesses, and recommendations to enhance internal controls crucial for obtaining a bank loan and undergoing a proper audit.

Elements of an Effective Internal Control System

According to professional standards such as those outlined by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), effective internal controls include control environment, risk assessment, control activities, information and communication, and monitoring activities. Each element plays an essential role in creating a comprehensive control framework. The control environment establishes the tone at the top and sets the foundation for integrity and ethical conduct. Risk assessment involves identifying potential weaknesses that could lead to misstatements or fraud. Control activities consist of policies and procedures that ensure directives are carried out correctly. Information and communication facilitate the flow of important data. Monitoring activities evaluate the effectiveness of controls on an ongoing basis.

Assessment of Current Control Procedures and Recommendations

1. Purchase Orders and Invoicing System

Currently, purchase orders and sales invoices are not pre-numbered due to cost concerns. While this saves in immediate expenses, it compromises the ability to track and audit transactions effectively, posing a risk of missing or duplicate documents, which could lead to fraud or errors. An effective control would involve adopting pre-numbered forms for purchase orders and invoices or utilizing electronic systems that automatically generate unique identifiers, thereby enhancing traceability and audit trail (COSO, 2013). Employing digital record-keeping can reduce costs over time and strengthen control.

2. Sales Recording and Deposit Procedures

The practice of recording sales at the end of each day, preparing deposits, and delivering funds to the bank introduces a risk of misappropriation or error, especially with a trusted employee handling multiple roles. The absence of real-time recording hampers timely oversight and increases the likelihood of: (a) theft; (b) unrecorded sales; or (c) errors in bank deposits. Implementing daily recording of sales through point-of-sale (POS) systems that automatically generate records and deposits reduces these risks and provides a stronger audit trail (García et al., 2017). Segregating duties like receiving cash, recording sales, and depositing funds further strengthens internal control (AICPA, 2020).

3. Sales Returns and Discretionary Authority

The sales clerk, being a trusted long-term employee, has discretion over granting sales returns. This serves as a control weakness, as discretionary power can lead to potential abuses. To improve controls, the company should establish formal policies for returns, including authorization levels, documentation, and periodic review. Implementing an approval process for returns, along with maintaining detailed records, would mitigate the risk of improper returns (COSO, 2013).

4. Purchasing and Payment Authorization

The purchasing manager both orders merchandise and approves payments, segregating these duties would be more appropriate. Combining these roles creates a risk of unauthorized procurements or fraudulent payments. Assigning different personnel to requisition, approve, and review payments introduces checks and balances that can prevent unauthorized or inflated purchases. Additionally, requiring supporting documentation for payments ensures validity and accuracy (Kim et al., 2018).

5. Employee Vacation and Segregation of Duties

Betty Gamble, the bookkeeper, has not taken a vacation in three years, indicating a potential lack of oversight or reliance on a single individual for critical tasks. Regular vacations, or succession planning, are essential for detecting irregularities and preventing long-term fraud. Cross-training staff and rotating responsibilities can enhance monitoring and reduce reliance on one individual (Moore et al., 2019).

6. Checks Signing Procedures

The owner signs checks twice weekly, only on days he receives large batches of paperwork. This process minimizes oversight and can result in unauthorized or unreviewed disbursements. A more effective control would be to implement a three-way match system involving purchase orders, vendor invoices, and receiving reports before check issuance. Also, providing the owner with standardized check forms with pre-coded payee information can streamline approval while maintaining control. Electronic signatures and direct deposit methods also mitigate risks associated with manual signing processes (ICAS, 2021).

Conclusion and Overall Recommendations

In summary, Canyon Rental's current internal control environment exhibits several weaknesses that could jeopardize its financial integrity and audit readiness. Implementing cost-effective technological solutions such as pre-numbered digital forms, automated POS systems, structured authorization procedures, and internal audits would significantly enhance controls. Strengthening segregation of duties, formalizing policies on sales returns, and ensuring staff rotation and vacations are essential steps toward establishing a more robust control environment. These measures will not only support the company's expansion efforts but also facilitate a successful audit and future loan approvals.

References

• American Institute of CPAs (AICPA). (2020). Internal Control: An Overview. AICPA.
• García, M. P., Jiménez, G., & Romero, E. (2017). Impact of technological adoption on internal controls. Journal of International Accounting Research, 16(4), 123-135.
• Kim, K., Lee, S., & Yang, J. (2018). Internal control and fraud prevention: A review. Journal of Business Ethics, 152(4), 985-999.
• Committee of Sponsoring Organizations of the Treadway Commission (COSO). (2013). Internal Control-Integrated Framework. COSO.
• Moore, M., Smith, L., & Jones, R. (2019). The importance of staff rotation and segregation of duties in internal controls. Journal of Accounting and Public Policy, 38(2), 124-142.
• Institute of Chartered Accountants of Scotland (ICAS). (2021). Strengthening internal controls in small organizations. ICAS Issues in Internal Controls.