question archive English Imports is an importer of silver, brass, and antique furniture items from England
English Imports is an importer of silver, brass, and antique furniture items from England
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English Imports is an importer of silver, brass, and antique furniture items from England. Patricia Kregg is the general manager of English Imports. Kregg employs two other people in the business. Polly O’Hara serves as the buyer for English Imports. In her work, O’Hara travels throughout England to find interesting new products. When O’Hara finds a new product, she arranges for English Imports to purchase and pay for the item. She helps the English artisans prepare their invoices and then faxes the invoices to Kregg in the company office.
Kregg operates out of an office in Boston, Massachusetts. The office is managed by Lesley Luck, who handles the mail, keeps the accounting records, makes bank deposits, and prepares the monthly bank reconciliation. Virtually all of English Imports’ cash receipts arrive by mail—from sales made to Target, Pier 1 Imports, and specialty shops.
Luck also prepares checks for payment based on invoices that come in from the suppliers
who have been contacted by O’Hara. To maintain control over cash payments, Kregg examines the paperwork and signs all checks.
Requirement
1. Identify all the major internal control weaknesses in English Imports’ system and how the resulting action could hurt English Imports. Also state how to correct each weakness.
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The internal control weaknesses in English Imports' system are:
1. O'Haracontrols the content of the invoices. With no supervision of her work, O'Hara could have the suppliers overstate their prices and then arrange to have them split the excess with her after English Imports pays the invoices.
2. Luck has both cash handling and accounting duties. With both responsibilities, Luck could steal incoming cash and cover her theft by manipulating the accounting records.
As with all small businesses, the key to effective internal control is more owner involvement.Kregg could:
1. Make the purchase and pay arrangements with the English artisans who supply English Imports' products. Let O'Hara keep locating new products, but don't let her arrange for the purchases and payment.
2. Kregg could assign either cash handling or accounting duties to Luck and then hire someone else to do the other (accounting or cash-handling) duties. Also Kregg needs to perform the bank reconciliation to keep her eye on cash receipts and cash payments.
