Core Concepts of Accounting Information Systems, 13th Edition, by Simkin, Rose, and Norman
13-15.
Weaknesses
Recommended Improvements
1. Raw materials may be
removed from the storeroom
upon oral authorization from
one of the production
foremen.
1. Raw materials should be removed from the
storeroom only upon written authorization from an
authorized production foreman. The authorization
forms should be prenumbered and accounted for, list
quantities and job or production number, and be
signed and dated.
2. Ashland’s practice of monthly
physical inventory counts does
not compensate for the lack of
a perpetual inventory system.
Quantities on hand at the end
of one month may not be
sufficient to last until the next
month’s count. If the company
has taken this into account in
establishing reorder levels,
then it is carrying too large an
investment in inventory.
2. A perpetual inventory system should be established
under the control of someone other than the
storekeepers. The system should include quantities
and values for each item of raw material. Total
inventory value per the perpetual records should be
compared with the general ledger at reasonable
intervals. When physical counts are taken, they too
should be compared to the perpetual records. Where
differences occur, they should be investigated, and if
the perpetual records are in error, they should be
adjusted. Also, controls should be established over
obsolescence of stored materials.
3. Raw materials are purchased
at a predetermined reorder
level and in predetermined
quantities. Since production
levels may often vary during
the year, quantities ordered
may be either too small or too
great for the current
production demands.
3. Requests for purchases of raw materials should come
from the production department management and be
based on production schedules and quantities on
hand per the perpetual records.
4. The accounts payable clerk
handles both the purchasing
function and payment of
invoices. This is not a
satisfactory separation of
duties.
4. The purchasing function should be centralized in a
separate department. Prenumbered purchase orders
should originate from and be controlled by this
department. A copy of the purchase order should be
sent to the storeroom clerks. Consideration should
be given as to whether the storeroom clerks’ copy
should show quantities.
5. Raw materials are always
5. The purchasing department should be required to
Core Concepts of Accounting Information Systems, 13th Edition, by Simkin, Rose, and Norman
6. There is no receiving
department or receiving
report. For proper separation
of duties, the individuals
responsible for receiving
should be separate from the
storeroom clerks.
6. A receiving department should be established.
Personnel in this department should count or weigh
all goods received and prepare prenumbered
receiving reports. These reports should be signed,
dated, and controlled. Copies should be sent to the
accounting department, purchasing department, and
storeroom.
7. There is no inspection
department. Since high cost
electronic components are
usually required to meet
certain specifications, they
should be tested for these
requirements when received.
7. An inspection department should be established to
inspect goods as they are received. Prenumbered
inspection reports should be prepared and accounted
for. Copies of these reports should be sent to the
accounting department.
13-16.
a. The separation of duties is meant to safeguard assets; in this case, cash receipts.
13-17. Most students believe that Ron Mitchell’s method of stealing cash receipts will be
detected by the movie theater’s manager assuming that the manager uses a few internal control
procedures.
SM 13.9
First, the tickets issued by Ron to theater patrons should be pre-numbered and controlled by the
manager. At the beginning of Ron’s work shift, he should be made accountable for a specific
quantity of pre-numbered tickets and not have access to any other tickets. At the end of Ron’s
then count the total actual cash that Ron collected during his work shift. (Of course, the amount
of change fund that Ron was provided at the start of his shift should be subtracted from his total
An additional control procedure that the theater manager may want to implement is to
Case Analyses
13-18. Lobs, Love & Lessons Tennis Club
Weaknesses
Recommended Improvements
1. The employee at the desk could
allow friends to enter at no
charge.
1. There needs to be some separation of duties.
There could be another person at the front desk
where the visitor completes the waiver form and
obtains a daily pass. The first employee would
then require a pass and would not handle cash.
(Note – this may be cost prohibitive)
2. The employee at the desk could
pocket cash.
2. The same control as #1.
3. The cash receipts are not
controlled.
3. The cash receipts should be kept in a file. They
should also be sequentially numbered.
4. There may be many different
desk employees throughout the
4. There should be a log of employees and their
working hours. They need to sign in and out.
Core Concepts of Accounting Information Systems, 13th Edition, by Simkin, Rose, and Norman
will be no accountability.
5. There does not appear to be a
procedure for comparing the
cash receipts journal entry and
bank deposit with the cash
receipts given to employees at
the desk.
5. Someone other than the accountant and the desk
employees should periodically compare the cash
receipts journal entries, bank deposit slips, and
cash receipts kept on file.
13-19. West End Boutiques
1. (a) The risk is that merchandise is stolen.
(b) Shoplifting is a very large problem for retailers. There should be better inventory
returned for cash.
attributable to poor inventory control.
4. (a) The risk is that cash will not be deposited.
(b) This can easily be controlled by requiring daily reconciliations by a party not involved in
receiving or depositing cash.
6. (a) The risk is that petty cash will be pilfered.
13-20. Chesapeake Grocery Store
1. This is a list of several risks that should be obvious to students:
Risk
Internal Control to Mitigate Risk
1
The managers might
intentionally or unintentionally
report the wrong number of
hours worked for each
employee.
Charlie should check the number of hours on the
timecards for each employee, and reconcile the
number of hours with the report each manager turns
in weekly.
He should also confirm that each employee
reported by each manager is currently an employee
of the store.
2
Charlie’s job as the accountant
suggests that there is no
segregation of duties
(recording, authorizing, and
custody).
This is one of the most important concerns for
small businesses, but one that owners ignore at
their own peril. Since this is a once-a-month
occurrence, George should consider oversight of
this process by his independent auditor (you)!
3
Charlie is using an Excel
spreadsheet to enter pay
information about employees.
Input errors can happen. Again,
they might be either intentional
or unintentional errors.
Input controls are necessary. While this topic is not
covered in this next chapter, students should be
aware that the process of entering data can
introduce human error.
In any case, controls are important to ensure the
validity, accuracy and completeness of the data
Charlie enters.
4
Following up on #2 above,
Charlie prints the payroll
checks and distributes them.
He should not have the
responsibility to do both of
these tasks.
Again, since this is a once-a-month occurrence,
George should consider oversight of this process by
his independent auditor (you). After Charlie prints
the checks, you should distribute the checks to each
employee and have them sign for the check. This
ensures that Charlie does not pay someone who is
not an employee, or that Charlie pays himself more
than he should.
5
The problem does not indicate
whether the checks are pre-
numbered or not.
Checks should be pre-numbered to account for all
of the checks and reconcilede against the payroll
register.
2. Here again, the students might find a variety of acceptable software solutions. The important
thing for students to understand is the company size, number of employees, and cost. Hopefully,
Core Concepts of Accounting Information Systems, 13th Edition, by Simkin, Rose, and Norman
SM 13.12
In Chapter 11, we identified several examples of payroll software solutions. Those that we
ADP Payroll Software for Microsoft Office Small Business Accounting
(http://www.microsoft.com/smallbusiness/products/office/accounting/payroll-
software.mspx)
As George’s advisor, you would discuss with him the following Pros and Cons of outsourcing:
Outsourcing Payroll Pros
potentially improve operations.
Can be cost-effective since CGS is not large enough to effectively segregate duties.
Charlie could be used in a more strategic role to help George find cost efficiencies.
Outsourcing Payroll Cons
The company must be experienced and competent.