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Red Bluff Inn & Café: Establishing Effective Internal Control I a Small Business

Essay by   •  December 13, 2017  •  Case Study  •  523 Words (3 Pages)  •  1,825 Views

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Red Bluff Inn & Café: Establishing Effective Internal Control I A Small Business

     Matthew Franklin was the owner of a small 18-room motel, and café and hired a young couple to help him run the day-to-day business. However, the young couple has more control over operations or records related to motel and café than Matthew, which made him nervous. Hence, Matthew invited an auditor to assess the internal control of his business and design an excellent internal control that detects and prevents frauds.

              An excellent internal control is vital for companies because its purpose is to promote operational efficiency, minimize errors and theft, safeguard the company's assets and enhance the reliability and accuracy of accounting data.

         By understanding the internal control system of the motel, the auditor found it's deficient because it lacked segregation of duties. In particular, the young couple was responsible for hiring new employees and also maintain records of rooms rented, meal served, and payment receives, which pushed the risk of control into the high area because the lack of segregation of duties would give them opportunities to embezzle cash and make inaccurate reporting. So, the author suggests Matthew should separate responsibilities of the young couple by hiring several independent employees who are responsible for some important jobs, such as recording rooms rented, receiving payment and retaining employees. Besides, to ensure that his advice is working effectively, the auditor should inquire different employee to understand what each employee is doing, and review documents, such as checks, invoices, cash receipt journal, and sale journal, to make sure various employees finished the all of the documents.

      Furthermore, the auditor found the café had high risk in its internal control as well because of little oversight or monitoring by owner. In particular, the owner, Matthew, lived far away and it is hard for him to stop by his café frequently, which increase risks of embezzlement of cash and caused low productivity.  Hence, the auditor advises owner should install cameras on his café because they would be over the registers to ensure that employees cannot steal cash. Employees would also work harder and not waste time because they know they are monitored. Besides, the auditor should do some tests to guarantee that his design is working well. In general, the auditor should check the cameras are installed in the café and make sure that cameras are working well.

      Finally, Matthew as the owner of the inn and café should increase internal control by changing environmental control. Specifically, Mathew issues code of conduct, with emphasis on integrity and ethics, to make employees know what behaviors are acceptable. Besides, Mathew should establish comprehensive human resource policies that focus on investigating applicants about educational background, prior work experience, integrity and ethical behavior, to increase the quality of new employees. The two approaches help Matthew to create a good environment control that decreases frauds and improve effectiveness of internal control.

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