Table of Contents
a. The major internal control weakness that exists at Crimson Electricals is the lack of proper segregation of duties. According to the concept of segregation of duties, no single person should have control over all the three functions – having custody, authorization of use of asset and recordkeeping of asset (Lumen Learning, n.d.). As per the facts provided in the case of Crimson Electricals, there is no proper segregation of duties as Albert is responsible for handling all receipts from cash sales, and for depositing them into the bank. Another employee is solely responsible for shipping, stocking and shipping of orders and the third employee has complete control over all the accounting records- general ledger, inventory, Accounts Payable, payroll etc.
Another important internal control weakness that exists at Crimson Electricals is lack of rotation of employee duties such that each employee continues to perform the same duties over a long period of time and is in a position to conceal any fraud or theft carried out by them. In this case, Albert has been with the company for a long period of time and has been carrying out the same duties and responsibilities since the time he joined Crimson Electricals. Further, he has never taken any sick leave or personal leaves for more than a day so that any other member of staff can carry out his responsibilities. After considering all these factors, it is evident that Albert is in a position to carry out any fraud or theft as there is no rotation of duties.
b. Assuming that no additional employee can be hired, the owner of Crimson Electricals should divide responsibilities between the three staff members in such a way that there is proper segregation of duties. For example – if one employee is performing the receiving and stocking function, then the dispatch of orders should be done by another employee. Also, there should be a rotation of duties amongst employees after six to eight months so that any fraud, theft carried out by the first employee could be revealed.
There are two major internal control weaknesses in this purchase system- the first one being that there is no formal purchase policy in place. In the given purchase system of a wholesaler, it is the purchasing clerk who is responsible for the selection of a supplier from the valid supplier file and send a purchase order to the supplier if the quantity of a particular item is too low. This means that the selection of a supplier with whom the order is to be placed is at the discretion of the purchasing clerk so there exists a possibility that the purchasing clerk may only select those suppliers from whom they might be receiving some monetary or non-monetary benefits. It is also possible that the purchasing clerk may misuse the discretion available to him to make purchase orders at a rate which is not in the best interests of the business. The purchasing clerk is in a position to make improper purchase decisions in case of collusion with any supplier. Every business must put in place a proper formal purchase policy which provides authority to a specific person(s) to make the purchases, choose vendors. Further, the purchase policy should also provide guidance on the selection of suppliers i.e. what points must be considered while selecting a supplier (Wroblewski, 2018). The price, discount, return policies, payment terms, credit period etc should be considered before selecting a supplier.
The second major weaknesses that are found in the said purchase system is that there is no appropriate segregation of duties between stocking of goods and updating of inventory ledger. Both the functions – storing the goods in the warehouse and updating of inventory records is done by the warehouse clerk. This is a loophole in the purchases system because this puts the warehouse clerk in a position to involve in any theft or misappropriation of inventory any manipulate inventory records to prevent detection of such theft or misappropriation.
The first uncontrolled risk that is faced by the payroll system of the company is the risk of overpaying employees due to improper timekeeping system and procedures in place. It has been provided in the facts of the case that the company has in place a time clock for the purpose of recording time spent by its employees on the job. However, this time clock is placed in that area of the premises of the company which is not supervised adequately. Even though the site supervisor is present, he is not able to supervise the recording process properly and continuously as he has other duties to be performed by him. This inadequate monitoring of the time recording process could cause the employees to take undue advantage of this flaw in the payroll system, and they may often ask other employees to clock-in their time. It is possible that certain employees may not have actually worked on some of the days for which present their timecards or may have worked for shorter hours. However, as the company pays its employees based on the time recorded in their timecards which could be inaccurate, the company may be significantly overpaying its employees.
The second uncontrolled risk that exists here is that the payroll records of the company are prone to data loss as the payroll records are maintained and stored by the payroll clerk using a standalone workstation and there is no back up that is maintained of the valuable payroll data (Dubois, n.d.). The company may lose its payroll records if the standalone computer on which payroll records are maintained crashes or if there is a disaster or an unfortunate event like a fire outbreak in the company.
Eavesdropping refers to the act of secretly overhearing the conversation between two or more people without their knowledge. It is an intrusive way of listening to those conversations and it's not authorized.
Identity theft is an act of using the personal or financial information of an individual so as to misuse that information for obtaining certain financial gains or other gains. It is considered as a crime.
Under the salami technique, a criminal makes theft of money in small parts over a long period of time such that they are able to collect a good amount of resources over a long period of time and their crime remains undetected as it is carried out in small parts and cannot be noticed easily.
Scavenging refers to the act of looking for some information or some object or document in a collection of information/documents/objects that have been discarded.
Hacking is the act of obtaining unauthorized access into the computer system of another person so as to steal, destroy or modify the information present in a computer system.
Skimming is a fraudulent activity in which some of the cash is taken from daily receipts of business and a lesser amount is recorded in accounting records.
Social engineering refers to the act of influencing and convincing the people so as to force them to reveal certain confidential information.
Trojan Horse is malicious software that can take control of the computer system of another person.
Worm is a virus in the terminology of the computer that is able to multiply itself and spread to other computers.
Vishing is a crime in which the criminal uses a telephone to obtain personal or financial information of another person for their financial gains or other benefits.
Capture the transactions
Record transactions in special journals
Post to the subsidiary ledger
Post to general ledger
Prepare the unadjusted trial balance
Journalise and post-closing entries
Make adjusting entries
Journalise and post adjusting entries
Prepare the adjusted trial balance
Prepare the financial statements
Dubois J. (n.d.). Risks in the Payroll Cycle. Retrieved from https://smallbusiness.chron.com/risks-payroll-cycle-68034.html
Lumen Learning. (n.d.). Internal Control Structure. Retrieved from https://courses.lumenlearning.com/sac-finaccounting/chapter/internal-control-structure/
Wroblewski M.T. (2018). Steps for Internal Control on Purchases. Retrieved from https://smallbusiness.chron.com/steps-internal-control-purchases-69919.html
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