Internal Control Components

p1. Arcadia Company, a small retail bookstore, has experienced losses of inventory over the past year. Jason Arcadia, the owner, on the advice of his accountant, has adopted a set of internal controls in an effort to stop the losses. Arcadia has taken the following steps:

1.    He regularly considers ways in which inventory losses might occur.

2.    He had his accountant set up an accounting system over inventory.

3.    He requires all new and existing employees to attend a training session in which they are instructed in their duties.

4.    He makes sure that different employees perform the duties of authorization, cus- tody, and recordkeeping.

5.    He spends time “on the floor” encouraging employees to follow the procedures.

6.    He periodically gathers appropriate information about inventory situations and communicates his findings to employees.

7.    He had all items in inventory marked with an electronic bar code that signals an alarm if someone tries to take an item out of the store without paying for it.

8.    He observes and reviews how internal control procedures are carried out.

9.    He hires his accountant to periodically conduct internal audit work.

ReQUIReD

1.    Show that Arcadia’s new system engages all the components of internal control by matching each of the steps with the internal control components that follow. (Hint: Some may have more than one answer.)

 

a.    Control environment

b.    Risk assessment

c.    Control activities

 

d.   Information and communication

e.    Monitoring

 

 

 

 

2.    Business appliCation ▶ As the owner of a small company, why is it important that Jason Arcadia take an active part in the management of the internal control system?