Correcting internal control weakness

P8-22A. Correcting internal control weakness.

Each of the following situations has an internal control weakness.

a. Upside-Down Applications develops custom programs to customer’s specifications.

Recently, development of a new program stopped while the programmers

redesigned Upside-Down’s accounting system. Upside-Down’s accountants

could have performed this task.

b. Norma Rottler has been your trusted employee for 24 years. She performs all

cash-handling and accounting duties. Ms. Rottler 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 $30,000 a year and

she has no source of outside income.

c. Izzie Hardwoods, a private company, falsified sales and inventory figures in

order to get an important loan. The loan went through, but Izzie later went

bankrupt and could not repay the bank.

d. The office supply company where Pet Grooming Goods purchases sales

receipts recently notified Pet Grooming Goods that its documents were not

pre-numbered. Howard Mustro, the owner, replied that he never uses receipt

numbers.

e. Discount stores such as Cusco make most of their sales in cash, with the

remainder in credit card sales. To reduce expenses, one store manager ceases

purchasing fidelity bonds on the cashier.

f. Cornelius’ Corndogs keeps all cash receipts in an empty box for a week because he

likes to go to the bank on Tuesdays when Joann is working.

Requirements

1. Identify the missing internal control characteristics in each situation.

2. Identify the possible problem caused by each control weakness.

3. Propose a solution to each internal control problem.