-4 Identifying Internal Control Principles in Cash Payment Processes Home Repair Corp. (HRC) operates a building maintenance and repair business. The business has three office employees—a sales manager, a materials/crew manager, and an accountant. HRC’s cash payments system is described below. a. After a contract is signed with a customer, the sales manager prepares a prenumbered purchase requisition form that indicates the materials needed for the work at the repair site. b. Based on the purchase requisition form, the materials/crew manager prepares and sends a prenumbered purchase order to suppliers of materials, advising them of the specific materials needed and the repair site to which they should be delivered. c. The materials/crew manager is the only employee authorized to order goods. d. Upon receiving a supplier’s invoi
E5-4 Identifying Internal Control Principles in Cash Payment Processes
Home Repair Corp. (HRC) operates a building maintenance and repair business. The business has
three office employees—a sales manager, a materials/crew manager, and an accountant. HRC’s
cash payments system is described below.
a. After a contract is signed with a customer, the sales manager prepares a prenumbered
purchase requisition form that indicates the materials needed for the work at the repair site.
b. Based on the purchase requisition form, the materials/crew manager prepares and sends a
prenumbered purchase order to suppliers of materials, advising them of the specific materials
needed and the repair site to which they should be delivered.
c. The materials/crew manager is the only employee authorized to order goods.
d. Upon receiving a supplier’s invoice, the accountant compares it to terms indicated on the
purchase order, noting in particular the prices charged and quantities ordered.
e. If these documents are in agreement, the accountant prepares a prenumbered check, stamps
the invoice “paid,” and prepares a
explanation references the sequential number on the purchase order.
f. HRC’s owner prepares a monthly bank reconciliation and reviews checks returned with the
bank statement to ensure they have been issued to valid suppliers.
Required:
1. For each statement (a)–(f), identify the internal control principle being applied.
2. Using the above description, prepare a list of steps and documentation similar to the first two
columns of Exhibit 5.6. Also include a third column that lists the individuals performing each
step. Which document in Exhibit 5.6 is excluded from the above description?
3. After several months, HRC’s materials/crew manager is arrested for having $20,000 of
materials delivered to his home but charged to the company. Identify the internal control
weakness that allowed this theft to occur.
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