Question

For each of these five separate cases, identify the principle(s) of internal control that is violated. Recommend what the business should do to ensure adherence to principles of internal control.

5. Carla Farah’s manager has told her to reduce costs. Carla decides to raise the deductible on the plant’s property insurance from \(5,000 to \)10,000. This cuts the property insurance premium in half. In a related move, she decides that bonding the plant’s employees is a waste of money because the company has not experienced any losses due to employee theft. Carla saves the entire amount of the bonding insurance premium by dropping the bonding insurance.

Short answer

Answer

More data is needed to be aware that the organization can manage the transition cost to the higher deductible on the property insurance. Nonetheless, it can say that dropping the insurance for holding the workers weakens internal control. If the organization needs to participate in cost-cutting, it should get it done without undermining its internal controls. The insurance for employees holding (or, if nothing else, key workers and those in sensitive positions) should be reinstated.

Step-by-step solution

Step-by-Step SolutionStep 1: Introduction to topic

Bonding insurance: Bonding Insurance resembles one more kind of coverage in an insurance plan. They ensure payment when the conditions aren't satisfied by the terms in a signed contract.

Recommend ensuring adherence to principles of internal control

Violates the insuring of assets and the bonding of key employees:

Carla Farah's supervisor has advised her to decrease costs. Carla chooses to raise the deductible on the plant's property insurance. This slices the property insurance premium in half. In a related move, she concludes that holding the plants' employees is a waste of cash since the organization has not encountered any losses due to employee theft. Carla saves the whole measure of the bonding insurance premium by dropping the bonding insurance.