Michelle Edwards operates a small dress shop that sells various items of apparel and accessories. She employs two clerks who make sales to customers, accept returns when a customer is dissatisfied with merchandise, and put new merchandise on display. One of the clerks, Kristen Scott, was hired recently. Michelle had always done all the accounting for the store and had made bank deposits. However, Kristen has offered to do the accounting for the store during slow periods when there are no customers in the store; she also has begun making bank deposits as she leaves for the day. Having Kristen take these responsibilities allows Michelle more time for acquiring merchandise for the store and for personal errands. What potential risks for the success of Michelle's business are present in this
situation?
What will be an ideal response?
Whenever possible, the functions of authorization, recording, and custody of assets should be performed by separate individuals. This situation is risky because there is not sufficient segregation of duties. Kristen could steal merchandise or cash or give items to her family or friends and cover it up by making entries into the accounting system. The situation as described would allow Kristen to engage in systematic, long-term theft from the business, reducing its profitability.
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