Home Repair Corp. (HRC) operates a building maintenance and repair business. The business has three office employees— a sales manager, a materials/ crew manager, and an accountant. HRC’s cash payments system is described below.
a. After a contract is signed with a customer, the sales manager prepares a prenumbered purchase requisition form that indicates the materials needed for the work at the repair site.
b. Based on the purchase requisition form, the materials/ crew manager prepares and sends a prenumbered purchase order to suppliers of materials, advising them of the specific materials needed and the repair site to which they should be delivered.
c. The materials/ crew manager is the only employee authorized to order goods.
d. Upon receiving a supplier’s invoice, the accountant compares it to terms indicated on the purchase order, noting in particular the prices charged and quantities ordered.
e. If these documents are in agreement, the accountant prepares a prenumbered check, stamps the invoice “paid,” and prepares a journal entry to record the payment. The journal entry explanation references the sequential number on the purchase order.
f. HRC’s owner prepares a monthly bank reconciliation and reviews checks returned with the bank statement to ensure they have been issued to valid suppliers.
1. For each statement (a)–(f), identify the internal control principle being applied.
2. Using the above description, prepare a list of steps and documentation similar to the first two columns of Exhibit 5.6. Also include a third column that lists the individuals performing each step. Which document in Exhibit 5.6 is excluded from the above description?
3. After several months, HRC’s materials/ crew manager is arrested for having $ 20,000 of materials delivered to his home but charged to the company. Identify the internal control weakness that allowed this theft to occur.