Hall Cases

INTERNAL CONTROL CASES
1. Solution Smith’s Market

a), b) See diagrams on the following pages.

c) Internal Control Weaknesses

1) Access to the cash drawers by sales clerks requires more accountability. Each drawer is accessed by various clerks throughout the day and cash may be withdrawn by any of them.

2) The internal cash register tape should be used as a control to determine how much cash (including checks, and credit card vouchers) should be in the register drawer.

3) The shift supervisor does not sign for the specific amount of cash received or returned at the end of the day. He simply logs the drawers in and out.

4) The treasury clerk is unsupervised in the counting of cash.

5) The treasury clerk has asset custody and responsibility for recording sales and cash in the journal and General Ledger.
d)

2. Solution to Spice is Right

a), b), See diagrams on the following pages.

c) Internal Control Weaknesses

1) No credit check

2) Inventory control function is performed by warehouse clerk.

3) Accounting department bills customer, updates the AR account, and records sales in the Sales Journal thus reducing the opportunity to detect discrepancies between total sales and AR postings.

4) Customer is billed before order is actually shipped

5) Remittance List should be prepared in the mailroom

6) No journal voucher prepared by cash receipts clerk.

7) Cash receipts clerk does not prepare a deposit slip.

d) IT Controls for Basic Technology System

e) Flowchart of revised system

Student responses will vary for this part of the assignment. The following issues, however, need to be addressed.
Upgrade stand-alone computers to a networked environment
The internal control problems already covered that need to be corrected in the new system.

3. Solution to ABE Plumbing

a), b) See diagrams on the following pages.

c) Internal Control Weaknesses

1) No Credit check is performed.
2) The sales clerk closes the open sales order causing the sale to be recorded before the goods are actually shipped.
3) The warehouse clerk has asset custody and should not also update the inventory records.
4) The shipping clerk does not reconcile the stock release with the original order. This allows for the wrong items and or quantities to be shipped.
5) Customer is billed before the goods are shipped. Billing should be triggered by shipping notice. Instead, the customer invoice is printed from the closed sales order, which was prepared before the goods were shipped.

d) Flowchart of revised system
Student responses will vary for this part of the assignment. The following issues, however, need to be addressed.
The internal control problems already covered that need to be corrected in the new system.
A system configuration similar to figure 4-18 would be appropriate.

4. Solution to Walker Books

a), b), See diagrams on the following pages.

c) Internal Control Weaknesses

Sales Processing:

1) The credit check is performed by the sales representative

2) The sales department should not be maintain the sales journal

3) The warehouse should not be updating inventory subsidiary ledger Cash Receipts

4) Mail room workers have access to both check and remittance advices. This situation require a reduced span of control and separate mail room procedures for customer payments vs routine mail.

5) The accounts receivable clerk has access to both the checks and the customer accounts

d) IT Controls for Basic Technology System

e) Revised System Walker Books System

Student responses will vary for this part of the assignment but should address the internal control issues already covered.
5. Solution to AV Safety, Inc. a), b), d) See diagrams on the following pages.

c) Internal Control Weaknesses
1) No credit check is performed
2) Sales journal is updated before the goods are shipped
3) Warehouse clerk has access to inventory and also update the inventory ledger
4) Mailroom clerk has access to both the remittance advice and the checks, no remittance list id prepared.
5) AR clerk has access to both the checks and the remittance advices

d) IT Controls for a Basic Technology System

e) Student responses will vary for this part of the assignment, but should address the internal control issues identified above.

6. Solution to Premier Sports Memorabilia

a), b), d) See diagrams on the following pages. c) Internal Control Weaknesses
1) Transaction is recorded in Sales Journal before goods are shipped.
2) Warehouse and Shipping functions are combined. This removes control over picking and shipping the wrong products.
3) Mail room clerk should prepare a remittance list to control remittance advices and checks
4) Although not stated in the case as aproblem, the auditor should evaluate network access controls (passwords, access privileges) to ensure a proper segregation of duties

d) IT Controls

e) Student solutions to this part of the case will vary. The solution should address the control issues identified in part C.

7. Solution to Bait ‘n Reel

a, b, and e, see pages that follow

c)

Internal Control Weaknesses
1) The sales clerk performs the credit check this is a segregation of duties and transaction authorization problem.
2) Warehouse should not update the inventory and General ledger control accounts.
3) AR Clerk should not update the general ledger.
4) Billing and AR are combined. This structure will mask discrepancies between what was billed and what was recorded as a sale.
5) Supervision is needed in the mailroom because employees who open the mail have access to both cash and the remittance advice.
5) The cash receipts clerk has access to the assets (cash) and is responsible for updating the general ledger.
6) See 3 above.

d) It Controls