Featherbed Surf & Leisure Holidays Ltd. (Featherbed) is a resort company based on Vancouver Island. Its operations include boating, surfing, diving, and other leisure activities; a backpackers' hostel; a family hotel; and a five-star resort. Justin and Sarah Morris own the majority of the shares in the Morris Group, which controls Featherbed. Justin is the chairman of the board of directors of both Featherbed and the Morris Group, and Sarah is a director of both companies as well as the CFO of Featherbed.
Justin and Sarah have a fairly laid-back management style. They trust their workers to work hard for the company and reward them well. The accounting staff, in particular, is very loyal to the company. Justin tells you that some accounting staff enjoys their jobs so much they have never taken holidays, and they rarely take sick leave. Justin and Sarah have not bothered much in the past with formal procedures and policies, but they have requested that the accounting staff start documenting the more common procedures. Justin and Sarah do not conduct formal performance reviews; they rely on their staff to tell them when there is a problem.
There are three people currently employed in the accounting department, the most senior of which is Peter Pinn. Peter heads the accounts department and reports directly to Sarah. He is in his fifties and plans to retire in two or three years. Peter prides himself on his ability to delegate most of his work to his two staff members, Kristen and Julie. He claims he has to do this because he is very busy developing the policy and procedures manual for the accounting department. The delegated work includes opening mail, processing payments and receipts, banking funds received, performing reconciliations, posting journals, and performing the payroll function. Julie is a recently graduated chartered accountant. Kristen works part-time-coming into the office on Mondays, Wednesdays, and Fridays. Kristen is responsible for posting all journal entries into the accounting system and the payroll function. Julie does the balance of the work, but they often help each other out in busy periods. Kristen authorizes Julie's transactions, and Julie returns the favor by authorizing Kristen's transactions. Together, they usually make the accounts balance.
Required
(a) Explain how the internal control components are usually adjusted to meet the needs of small entities. What advantages and disadvantages does this bring?
(b) Assess the internal controls at Featherbed. What changes would you recommend?