Question

Franco Company is a rapidly growing start-up business. Its recordkeeper, who was hired six months ago, left town after the company’s manager discovered that a large sum of money had disappeared over the past three months. An audit disclosed that the recordkeeper had written and signed several checks made payable to her fiancé and then recorded the checks as salaries expense. The fiancé, who cashed the checks but never worked for the company, left town with the recordkeeper. As a result, the company incurred an uninsured loss of $184,000.

Evaluate Franco’s internal control system and indicate which principles of internal control appear to have been ignored.

Short answer

Asset holding and accounting were not required to be separated by the company's internal control system.

Step-by-step solution

Meaning of Internal Control System

Internal control is aset of procedures added to an organization's standard operating procedures to protect assets, reduce errors, and guarantee that operations are carried out according to protocol.

Evaluate Franco’s internal control system

Evaluation

Internal controls at the organization did not mandate that asset custody and recordkeeping be kept apart.

Indicate which internal control principles have been ignored

Principle ignored

1. The company's checks shouldn't have been signed by the recordkeeper.
2. The corporation seemed to have neglected to bond its employee, which resulted in a loss. If it had, the bonding business would have provided loss insurance. Suppose the company can conduct frequent, independent reviews of the accounting records earlier. In that case, there is a possibility that they may find the payments of salary checks to a nonemployee earlier.