List the seven principles of internal control and explain how a retail outlet might implement each of the principles in its store.

Part 1

Visit the Association of Certified Fraud Examiners website at acfe.com. Find and open the file “2014 Report to the Nation.” Read the two-page Executive Summary and fill in the following blanks. (The report is under its Fraud Resources tab or use the Search tab.)

1. The median loss caused by the frauds in our study was $145,000. Additionally, 22% of the cases involved losses of at least $1 million.
2. The typical organization loses 5% of revenues each year to fraud; this translates to a potential projected global fraud loss of nearly $3.7 trillion.
3. The median duration—the amount of time from when the fraud commenced until it was detected—for the fraud cases reported to us was 18 months.
4. Asset misappropriations are the most common fraud, occurring in 85%  of the cases in our study, as well as the least costly, causing a median loss of $130,000..
5. Only 9% of cases involved financial statement fraud, but those cases had the greatest financial impact, with a median loss of $1 million. Corruption schemes fell in the middle in terms of both frequency (37% of cases) and median loss (($200,000).
6. Over 40% of all cases were detected by a tip—more than twice the rate of any other detection method.
7. Owners/executives only accounted for 19% of all cases, but they caused a median loss of $500,000. Employees committed 42% of occupational frauds but only caused a median loss of $75,000. Managers ranked in the middle, committing 36% of frauds with a median loss of $130,000.
8. Approximately 77% of the frauds in our study were committed by individuals working in one of seven departments: accounting, operations, sales, executive/upper management, customer service, purchasing, and finance.
9. The vast majority of occupational fraudsters are first-time offenders; only 5% had been convicted of a fraud-related offense prior to committing the crimes in our study. Furthermore, 82% of fraudsters had never previously been punished or terminated by an employer for fraud-related conduct.

Part 2

Review the opening feature of this chapter that highlights Todd Masonis and Cameron Ring and their company Dandelion Chocolate. Their company has one retail store with plans to open at least one additional kiosk in the Ferry Building in San Francisco. Other retail outlets and expansion plans may be in the works.

Required

1. List the seven principles of internal control and explain how a retail outlet might implement each of the principles in its store.

Internal controls are a process taken by the board of trustees of management to provide a reasonable assurance to attain the objectives that will help achieve efficiency and effectiveness in business operations and enhance reliability in financial reporting.

1. Creation of responsibility:  this principle aims at enhancing accountability to the clerk that sits on the counter. It also issues responsibility to employees tasked with preparing orders and providing support to customers with responsibilities such as maintaining the inventory, cleaning the premises, and clerical duties (Kasper et al., 2015).
2.  Segregation of duties:  According to the segregation of duties in the internal control, the employee’s work should be done without duplication of effort. The organization should provide a reliable basis for evaluating the employee (Gates et al., 2016). For instance, the responsibility for record-keeping for the organization asset should be separated from the physical custody of the assets.
3. Ensure mechanical, physical, and electronic controls: the primary focus of the physical control is to safeguard the asset (Gates et al., 2016). Mechanical and electronic control focuses on safeguarding the assets and enhancing reliability and accuracy for the accounting records. For instance, use alarms to prevent break-ins.
4. Independent internal verification: this involves review, comparison, and reconciliation of the data prepared by the employees. Ensure to do periodical verification and on a surprise basis. The internal auditors will also do internal verification to verify the data prepared by the employees (Westhausen, 2017).
5. Bonding employees that handle cash: the store can implement this control by ensuring the business against theft. This type of insurance is known as the fidelity bond.
6. Rotating the employee’s duty and requiring the employee to take a vacation: Ensure the routine rotation of employees from one duty to another to prevent them from developing theft character. When employees stay in one position, they learn the weakness of your system and may find a way to exploit it. Therefore, rotating is a better way of preventing such outturn.  
7. Accurate information communication: The business will ensure the employees communicate accurately to reduce the risk of misinformation. This will be done using the store’s established internal communication protocol, such as mail, phone calls or internal memos.    

2. Do you believe that a retail outlet will need to add controls to the business as it expands? Explain.

As retail expands, it will need to add these controls to the business. The controls are meant to safeguard the business asset from theft, robbery, and unauthorized access by the employees and personnel. Moreover, the controls will help the business attain accuracy and reliability in its accounting records and reduce the risk of errors and irregularities in its accounting process. The controls will help the business to hire the right personnel and ensure responsibility for their duties. It will help the business to secure its physical and digital assets through the control and security systems. Taking independent reviews or using an internal auditor will help to review the data prepared by the employees and how the internal process suit business operations (Westhausen, 2017).

References

Gates, S., Prachyl, C. L., & Sullivan, C. (2016). Using report to the nations on occupational fraud and abuse to stimulate discussion of fraud in accounting and business classes. Journal of Business and Behavioral Sciences, 28(1), 106. https://www.acfe.com/rttn/docs/2014-report-to-nations.pdf

Kasper, D., Fauci, A., Hauser, S., Longo, D., Jameson, J., & Loscalzo, J. (2015). Harrison’s principles of internal medicine, 19e (Vol. 1, No. 2). New York, NY, USA:: Mcgraw-hill.

Westhausen, H. U. (2017). The escalating relevance of internal auditing as anti-fraud control. Journal of Financial Crime. https://doi.org/10.1108/JFC-06-2016-0041