Case Study - Internal Control
MCC Company, a local distributor, has asked your accounting firm to evaluate their system of
internal controls because they are planning to go public in the future. The President wants to be
aware of any new regulations required of his company if they go public, so he met with a colleague
of yours at a local restaurant. The President of the company explained the current system of
internal controls to your colleague. Your colleague has since been promoted to a tax position so
she has passed on the information below so you can generate recommendations for the partner
at your accounting firm to share with the President of MCC Company.
Since MCC Company is a relatively lean organization, they have a lot of faith in their long-term
employees. They have one accountant who serves as Treasurer and Controller which streamlines
many of their processes. In this dual role, he purchases all the supplies and pays for these
purchases. He also receives the checks and completes the monthly bank reconciliation. The
accountant is so busy that the company handles petty cash a bit differently. All employees have
access to the petty cash in a desk drawer and are asked to only place a note if they use any of
the cash.
The accountant has recently started using pre-numbered invoices and wants to buy an indelible
ink machine to print their checks. The President is waiting to hear from you if this is a necessary
purchase before authorizing.
On payday, the checks are picked up by the accountant and left in his office for pick-up. Before
he leaves for the weekend, he will move the checks into a safe in his office.
The President is still quite embarrassed because he had to fire one of his employees for viewing
pornography on a company computer. He later found out this individual was a convicted felon who
served time for molesting children. The company had a hard time getting the employee to admit
it was him because the company does not assign individual passwords. The President expressed
his frustration because both he and the accountant both interview and approve all of the new
hires.
Required:
Based on the above information, prepare a Word document to answer the following and submit
via email mcastillo@clb.edu.ph until December 18, 2022.
1. What are the weaknesses and threats that can be observed in the company?
Risks are inevitable. In this light, most companies face the risks of fraud and error
in terms of financial aspects. Thus, based on the situation and assessment as per MCC
Company, they are facing great risks of the aforementioned risks. If we were to use the
risks matrix, with the company having an accountant who’s a Treasurer and Controller at
the same time and all the employees having access to petty cash has a high likelihood of
fraud and error and a high consequence as it could damage the company’s profitability
and reputation at the same time.
To further discuss the given points that gives threat as poses as a weakness of the
company, first is the same person being a treasurer and a controller. Although it was
mentioned that the company has a lot of faith in their long-term employees, still they must
be skeptic and be professional at the same time. Skeptic in terms of the work that they
assign to their employees because as what was mentioned the accountant is the one who
process and purchases the supplies and also the one paying for it. In this scenario, the
risk of fraud is very high since the same person has the access and control over the
transactions and the money where he can easily manipulate the accounts and embezzle
the company’s money. In connection, it is also a weakness since having dual job is very
susceptible to error. Since the same person is receiving, checking and completes the bank
reconciliation, with the load of duties that was given to him and the stress it might cause,
the risk of committing error is not impossible. Moreover, this is a problem with the
professionalism and staffing of the company that is indeed visible to the statement “The
accountant is so busy that the company handles petty cash a bit differently.” which creates
another problem as the petty cash is not handled well to the point that everyone has an
access to it, and the access is the problem itself as money is indeed the most common
reasons of committing fraud. Furthermore, having an employee who was caught watching
pornography is also a weakness on how the employees were left unsupervised. This
proves that the internal control of the company is indeed lacking to the point that they even
had a hard time finding the culprit as they don’t have individual accounts with individual
passwords.
2. What are the internal control measures you can recommend to the President of the
company to address the weaknesses you identified in no. 1?
- With the problems stated above, MCC Company is really in dire need of evaluation in
terms of their internal control. Ofcourse, to be able to manage and mitigate possible
risks, a company must have good internal control. Hence, since MCC is lacking on this
part, I have come up with a few recommendations. First is for duties to be segregated
as it lowers the possibility of both inappropriate and incorrect acts, separation of roles
is essential for efficient internal control. Thus, as for the case of MCC Company this
will also help in promoting growth, stimulating productivity and avoiding slacking,
because when an employee knows his/her duties and responsibilities well, they will be
able to have a clearer mind and function effectively and efficiently. Second, the
company must have the right authorization, the employees should not have access to
the petty cash, instead have someone who will handle it and can authorize the
disbursement of the petty cash. The company’s attitude of having faith with their longterm employees could be used in this scenario as they can assign someone they can
trust enough to handle the cash. Third, is to have the proper staffing. The improper
segregation of duty arise from the fact that the company did not hire someone for the
specific position. Also, in terms of hiring they must look for professionals who has the
right credentials for the job so they could avoid firing them for inappropriate acts like
what was mentioned. Lastly, the employees must have their own corporate accounts
with encrypted passwords that they can use to work. This helps as it will distinguish
work and personal life. Also, this could help the managers in supervising the
employees and their work that has been done.