Fraud and internal controls (Learning Objectives 2 & 3) 15–20 min.

Each of the following situations has an internal control weakness.

a. Crystal Lund has been your trusted employee for 25 years. She performs all cash-

handling and accounting duties. Crystal just purchased a new Lexus and a new home in an expensive suburb. As owner of the company, you wonder how she can afford these luxuries because you pay her only $42,000 a year and she has no sources of outside income.

b. Sanchez Hardwoods allows its sales staff to grant credit to any customer. As a result, it has had several large write-offs in Accounts Receivable recently.

c. The office supply company where Power’s Sporting Goods purchases its business forms recently notified Power’s Sporting Goods that its documents were no longer going to be pre-numbered. Bill Powers, the owner, replied that he never uses the receipt numbers anyway.

d. Discount stores, such as Target, make most of their sales in cash, with the remainder in credit card sales. To reduce expenses, one store manager allows the cashiers to record sales in the accounting records.

Identify the missing internal control in each situation. Answers should include authorization, documentation, and separation of duties. Identify the possible problem caused by each control weakness. Answers should include theft and financial loss. Propose a solution to each internal control problem.

AppendixLO1