Following are five separate cases involving internal control issues. Required: 1. For each case, identify the principle(s) of internal control that is violated. a. Chi Han receives all incoming customer cash receipts for her employer and posts the customer payments to their respective accounts. b. Sutton Company has two employees handling acquisitions of inventory. One employee places purchase orders and pays vendors. The second employee receives the merchandise. c. Ben Shales prides himself on hiring quality workers who require little supervision. As office manager, Ben gives his employees full discretion over their tasks and for years has seen no reason to perform independent reviews of their work. d. At Tico Company, Julia and Trevor alternate lunch hours. Julia is the petty cash custodian, but if someone needs petty cash when she is at lunch, Trevor fills in as custodian. e. Nori Nozumi posts all patient charges and payments at the Hopeville Medical Clinic. Each night Nori backs up the computerized accounting system but does not password lock her computer.

Following are five separate cases involving internal control issues. Required: 1. For each case, identify the principle(s) of internal control that is violated. a. Chi Han receives all incoming customer cash receipts for her employer and posts the customer payments to their respective accounts. b. Sutton Company has two employees handling acquisitions of inventory. One employee places purchase orders and pays vendors. The second employee receives the merchandise. c. Ben Shales prides himself on hiring quality workers who require little supervision. As office manager, Ben gives his employees full discretion over their tasks and for years has seen no reason to perform independent reviews of their work. d. At Tico Company, Julia and Trevor alternate lunch hours. Julia is the petty cash custodian, but if someone needs petty cash when she is at lunch, Trevor fills in as custodian. e. Nori Nozumi posts all patient charges and payments at the Hopeville Medical Clinic. Each night Nori backs up the computerized accounting system but does not password lock her computer.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Question

### Understanding Internal Control Principles through Real-world Scenarios

Internal controls are crucial in an organization to ensure accuracy and reliability in financial reporting, effectiveness, and efficiency of operations, and compliance with laws and regulations. Below are five separate cases involving internal control issues, with each case illustrating the principle(s) of internal control that is violated.

#### Case Analysis

1. Chi Han receives all incoming customer cash receipts for her employer and posts the customer payments to their respective accounts.
- **Violated Principle(s)**: **Segregation of Duties** – One person should not handle all aspects of a financial transaction by themselves to prevent fraud and errors.

2. Sutton Company has two employees handling acquisitions of inventory. One employee places purchase orders and pays vendors. The second employee receives the merchandise.
- **Violated Principle(s)**: **Segregation of Duties** – While there is an attempt at segregation, ideally, the employee placing orders and paying vendors should be segregated. Additionally, the one receiving should not have financial responsibilities to provide a clear check and balance.

3. Ben Shales prides himself on hiring quality workers who require little supervision. As office manager, Ben gives his employees full discretion over their tasks and for years has seen no reason to perform independent reviews of their work.
- **Violated Principle(s)**: **Monitoring of Activities** – Independent checks and periodic reviews are vital for detecting and preventing irregularities.

4. At Tico Company, Julia and Trevor alternate lunch hours. Julia is the petty cash custodian, but if someone needs petty cash when she is at lunch, Trevor fills in as custodian.
- **Violated Principle(s)**: **Segregation of Duties** – Julia and Trevor should not both have access to petty cash without controls, as this can lead to misappropriation and lack of accountability.

5. Nori Nozumi posts all patient charges and payments at the Hopeville Medical Clinic. Each night Nori backs up the computerized accounting system but does not password lock her computer.
- **Violated Principle(s)**: **Physical and IT Controls** – Lack of computer security measures such as password protection can lead to unauthorized access and potential data breaches.

By examining these cases, we can better understand the importance of adhering to internal control principles to safeguard organizational assets and ensure accuracy in financial reporting.

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