West End Boutiques: Risks and Internal Controls to Mitigate the Problems
West End Boutiques
The West End Boutiques company was founded by Libbie Williams in 1990 with a single store in College Station,Texas, and the company now has 21 shops located in the triangle of Dallas, San Antonio , and Austin, Texas. Libbie was an accounting major in college, passed the entire CPA exam in her first attempt with high scores, and worked for one of the large CPA firms for 11 years prior to opening her first store. Based on her work experience, she fully understands the value of strong internal controls. Further, she recently selected a state-of-the-art accounting system that connects all of her stores' financial transactions and reports.
Libbie employs two internal auditors who monitor internal controls and also search for ways to improve operational effectiveness . As part of the monitoring process,the internalauditors take turns conducting periodic reviews of the accounting records. For instance, the company takes a physical inventory at all stores once each year and an internal auditor oversees the process. Chris Domain, the most senior internal auditor,just completed a review of the accounting records and discovered several items of concern. These were:
• Physical inventory counts varied from inventory book amounts by more than 6% at two of the stores. In both cases, physical inventory was lower.
• Two of the stores seem to have an unusually high amount of sales returns for cash.
• In nine of the stores, gross profit has dropped significantly from the same time last year.
• At four of the stores, bank deposit slips did not match cash receipts.
• One of the stores had an unusual number of bounced checks. It appeared that the same employee was responsible for approving each of the bounced checks.
• In seven of the stores, the amount of petty cash on hand did not correspond to the amount in the petty cash account.
Requirements
1. For each of these concerns, identify a risk that may have created the problem.
2. Recommend an internal control procedure to prevent the problem in the future.
Write a 175- to 260-word response to each of the two requirements (#1 and #2) following the case study. Your responses must be in your own words. In your paper, for Questions #1 and #2 list each of the six scenarios separately with their corresponding risks and internal controls to mitigate those risks. For Question #2, do not summarize internal controls -- each of the six scenarios should be listed separately with individual internal controls.
Case Study 6-19 "West End Boutiques"
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Case Study 6-19 "West End Boutiques"
The Risk that may Have Created the Problem in Each Concern
* Physical Inventory Counts were Lower than Inventory Book Amounts by more than 6% at Two of the Stores
The two West End Boutiques stores’ physical inventory counts were lower than inventory book amounts, probably because of loss or damage. An inherent risk occurs when organizations lose or damage their inventory without writing them off the statements.
* Two of the Stores have Unusually High Amounts of Sales Returns for Cash
When an employee overstates sales returns for cash, the company loses money. This overstatement results in inherent risk. According to Johnson et al. (2019), this risk may occur when workers steal their employer’s collections and overstate the accounts receivables. In addition, the risk happens when the employees overstate the sales returns.
* Gross Profit Dropped Significantly in Nine of the Stores from the Same Time Last Year
When workers understate gross profits, their employer loses cash. The understatement leads to inherent risk. Workers can overstate inventory to increase the cost of goods sold, hence reducing the gross profits leading to inherent risk (Johnson et al., 2019). It is better for West End Boutiques and not the employees to understate its income because the corporation might overstate the earnings in the future.
* Bank Deposit Slips did not Match Cash Receipts at Four of the Stores
When workers deposit less money than what they received for personal gains, it results in control risk. West End Boutiques’ internal control might not detect this fraudulent misstatement on time.
* Unusual Number of Bounced Checks in One of the Stores. Same Employee Approved All the Bounced Checks
When approving checks, workers need the experience to confirm whether customers have money or not in their bank accounts. An inherent risk arises if the employees judge wrongly and the checks bounce.
* The Amount of Petty Cash on Hand did not Match Amount of Petty Cash Account in Seven of the Stores
When individuals spend money from petty cash and forget to record it in the books of accounts, there will be a discrepancy which leads to inherent risk. Workers should be keen to remember to record such transactions.
The Internal Control Procedure to Prevent the Problem in Each Concern
* Physical Inventory Counts were Lower th...