Seegall Supply Company recently changed its system of internal control over its purchasing operations and cash payments to make the system more efficient. One employee is now responsible for both purchasing and receiving. For each purchase, that individual matches the purchase order with the receiving report and the supplier's invoice. The invoice is approved for payment by this individual and sent to the accounting department.
All cheques are pre-numbered and kept in a safe in the controller's office. The combination to the safe is known only by the controller, his assistant, and the company owner. Since the bank has never made a mistake with the account, the cheque numbers are not tracked.
The controller prepares all of the cheques and all of the journal entries. All cheques must be signed by the company owner, Stephanie Seegall. After the owner has signed the cheque, the controller stamps the invoice paid and has his assistant file the invoice and post the journal entry. Whenever the owner is going to be away for several days, she will leave signed blank cheques in the safe for the controller.
The controller prepares the monthly bank reconciliation. Every month he finds at least three cheques that have cleared the bank but have not been recorded by the company. These cheques are always properly signed by the owner. When the controller first started working for the company, he would ask the owner about the cheques.
These cheques were always for the owner's personal expenses, so now he always records these cheques as owner's drawings when doing the bank reconciliation.
Instructions
(a) Identify the control weaknesses over cash payments.
(b) What changes should be made to improve the internal control over cash payments?
Taking It Further
Oft en people think internal control activities are too much work and not necessary.
Explain how an improved system of internal control could help protect the individuals working for this company from being falsely accused of fraud?