Unit VI Case Study: Open Weight 12 Of Course Grade Rubric

Unit Vi Case Studyopenweight12 Of Course Gradegrading Rubricinstruct

Identify the weaknesses in internal control that you see in the system that John is recommending for Natalie, and suggest improvements if she hires him to do her accounting. Additionally, prepare a bank reconciliation for Cookie Creations’ June 2020 statement, including necessary adjusting entries and the reported cash balance in the balance sheet.

Paper For Above instruction

The case study involving Natalie’s business accounting system presents several internal control weaknesses, especially given the procedures recommended by her friend John. These weaknesses could compromise the accuracy of financial records, increase the likelihood of fraud or errors, and undermine the reliability of financial statements. Recognizing these vulnerabilities allows for strategic improvements that can strengthen internal controls and ensure the sound management of financial data.

One significant weakness in John's proposed system is the lack of segregation of duties. In his plan, John suggests holding cash in his vehicle until deposit time, recording deposits, writing checks, and maintaining the accounting records, effectively controlling multiple critical functions himself. This consolidation of duties can lead to a higher risk of theft or fraud, as there is no independent verification of cash handling and recording activities. Best practices in internal control advocate for separating responsibilities among different individuals—such as separating cash custody, recording, and reconciliation tasks—to reduce the risk of misappropriation or errors.

Another vulnerability is the absence of oversight and verification. Since John would keep the cash and handle all deposits and checks, Natalie has little opportunity to verify the accuracy of these transactions. This lack of oversight may lead to unintentional mistakes or intentional misappropriation, especially if John is not under regular supervision. Additionally, keeping cash in his vehicle is inherently risky, exposing the funds to theft, loss, or damage. Relying on physical cash handling outside of a secure environment diminishes the safeguards that secure banking deposits provide.

The recording process also shows weaknesses. By preparing checks and recording deposits without independent review, errors can go unnoticed. For instance, John's would involve signing checks he writes himself, which bypasses the potential scrutiny from Natalie or an external reviewer. Furthermore, the plan does not specify the use of supporting documentation, such as invoices or receipts, which are vital for audit trails and verifying transactions.

Preparing the monthly bank reconciliation as part of John's services is good practice, but if he is responsible for recording transactions and reconciling accounts, it’s imperative that this process includes oversight by Natalie or a third party for independence. Without such oversight, there remains a risk of intentional fudge of figures or overlooked discrepancies. Additionally, transferring manual records to a computer system does not inherently improve internal controls unless proper security measures and access controls are implemented in the digital environment.

To improve internal controls if Natalie considers hiring John, several measures are recommended. First, she should establish segregation of duties by ensuring different individuals handle cash receipt, recording, and reconciliation tasks. Instead of holding cash in a vehicle, adopting a secure cash storage method and depositing funds immediately upon receipt would mitigate theft risk. Implementing dual signatures on checks or a system of approvals can prevent unilateral check signing by John. Requiring supporting documentation for all transactions enhances accountability and auditability.

Moreover, implementing periodic independent reviews of financial records by a qualified accountant or bookkeeper can serve as an additional safeguard. The use of a computerized accounting system with role-based access controls can also restrict unauthorized modifications and create a secure audit trail. Natalie should also consider establishing clear policies for timely bank deposits, regular reconciliations, and audits to ensure ongoing internal control integrity.

For accounting transactions, it is critical that all transactions are properly documented and authorized,with checks signed by designated personnel rather than the individual who prepares them. Regular reconciliations, preferably performed by someone other than the person maintaining the records, help detect discrepancies early. Additionally, keeping cash in a secure, locked location rather than a vehicle ensures better security and reduces the risk of theft or loss.

In conclusion, the internal control weaknesses in the system recommended by John primarily stem from the lack of segregation of duties, reliance on physical cash handling, absence of oversight, and insufficient documentation. Implementing strategies such as separation of responsibilities, immediate deposits, secure cash storage, proper documentation, and independent reviews can significantly improve control environment for Natalie’s business. These measures will lead to more accurate financial data, reduced fraud risk, and increased confidence in her financial statements.

References

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  • Kaplan, R. S., & Norton, D. P. (2001). The strategy-focused organization: How balanced scorecard companies thrive in the new business environment. Harvard Business Review Press.
  • Moore, R. (2020). Physical controls and cash management. Internal Audit, 27(2), 22-29.
  • Singleton, T., & Singleton, A. (2019). Fraud auditing and internal control. Wiley.
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  • Zelman, W., & Glickman, M. (2017). Financial Management of Human Service Programs. Cengage Learning.

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