East-West Sports Shop is a small neighborhood sporting goods store. The shop’s owner, Sunny Hazel, has set up a system of internal control over sales to prevent theft and to ensure the accuracy of the accounting records.
When a customer buys a product, the cashier writes up a sales invoice that describes the purchase, including the total price. All sales invoices are pre-numbered sequentially.
If the sale is by credit card, the cashier runs the credit card through a scanner that verifies the customer’s credit. The scanner prints out a receipt and a slip for the customer to sign. The signed slip is put in the cash register, and the customer is given the receipt and a copy of the sales invoice.
If the sale is by cash or check, the cashier rings it up on the cash register and gives change, if appropriate. Checks must be written for the exact amount of the purchase and must be accompanied by identification. The sale is recorded on a tape inside the cash register that cannot be accessed by the cashier. The cash register may be locked with a key. The cashier is the only person other than Hazel who has a key. The cash register must be locked when the cashier is not present. Refunds are made only with Hazel’s approval, are recorded on pre-numbered credit memorandum forms, and are rung up on the cash register.
At the end of each day, Hazel counts the cash and checks in the cash register and compares the total with the amount recorded on the tape inside the register. Hazel totals all the signed credit card slips and ensures that the total equals the amount recorded by the scanner. Hazel also makes sure that all sales invoices and credit memoranda are accounted for. Hazel prepares a bank deposit ticket for the cash, checks, and signed credit card slips, less $40 in change to be put in the cash register the next day, and removes the record of the day’s credit card sales from the scanner. All the records are placed in an envelope that is sealed and sent to the company’s accountant for verification and recording in the company records. On the way home, Hazel places the bank deposit in the night deposit box.
The company hires experienced cashiers who are bonded. Hazel spends the first half-day with new cashiers, showing them the procedures and overlooking their work.
1. Give an example of how each of the following control activities is applied to internal control over sales and cash at East-West Sports Shop: (Do not address controls over inventory.)
b. Recording transactions
c. Documents and records
d. Physical controls
e. Periodic independent verification
f. Separation of duties
g. Sound personnel practices
2. Can the system as described protect against a cashier who accepts cash for a sale but does not ring up the sale and pockets the cash? If so, how does it prevent this action?