Good Establishing Internal Control In A Small Business Case Study Example

Small businesses are more vulnerable to the commission of fraud than any other type of business. This calls for the need for any small business owner to understand and implement control measures that reduce the possibility of the perpetration of fraud. In order to lessen or even reduce the opportunity and the motivation to commit fraud, a strong internal control should be implemented after due consideration.
1. The first concerns relating to the possible commission of fraud is the fact that Mr. Franklin planned to left the handling of cash to that of the husband and wife. While there is no concern about his trusts to the young couple, his plan opens an opportunity and motivation for them commit fraud especially in cash handling. It is suggested that Mr. Franklin hire another person who will be in-charge of the handling of cash as recording and cash handling are two incompatible jobs. This should not be left to the couple as this would open the opportunity and motivation to do wrong. In addition to receipts, there should be a plan to let every customer to sign in the books in order to have additional reference. Another internal control for cash is the reward for customers who reported non-issuance of receipts.
The second concern about the motel part of the business is the recording of the number of customers. As indicted above, this can be resolved by letting every customer sign in the logbook. Random checking should be done by Mr. Franklin and should inform the employees about. The thought that they are being checked lessens the motivation to do wrong.
2. The first concern about the café part of the business is Mr. Franklin being unaware of the number of meals being served as well as the cash inflow. The same internal control with the motel should be done, there should be segregation of duties as the couple should not be left in charge of the cash inflows. Surprise checking should also be implemented by the owner, in addition to developing unanimous reporting system and educating the employees about it. Needless to say, Mr. Franklin should also do the hiring of the other employees and not left to the couple. This is to avoid having employees with close relationships as it creates the opportunity for them to collaborate.
The second concern on the café is the pricing of meals. Mr. Franklin planned to leave everything to the couple and this may result to the couple stating the meals at a higher price. Segregation and proper recording of transactions is the best way to eliminate the possibility of fraud. In a way, the couple should only be in charge of the day-to day operation of the business but the handling of cash should be theirs.
3. The segregation of the handling of cash is an important consideration for Mr. Franklin. This is because cash is the asset that is most vulnerable to fraud. When there is separation of the handling of cash and recording of transactions, there is less possibility to commit fraud.
The anonymous reporting that may include customers and employees report may reveal fraudulent acts committed by the employees. While there no full assurance of this control that a fraud is committed, it warrants the necessity to further investigate and be wary. This may not fully eliminate the possibility of fraud, as there is no way to eradicate fraud completely, but it would at make the possibility of wrongdoings at bay.
The surprise visitations or audits are another means by which to eliminate fraud. An unannounced audit can help Mr. Franklin notice further improvement in the internal control of the entity. Surprise audits let the employees become aware that the owner is implementing internal control for the business and that the commission of fraud will not be tolerated.
4. The potential impact of the proposed measures is that the couple might be demoralized by the fact that someone else is assigned to handle cash. But since the business has yet to start, Mr. Franklin should well explain that this is how the business will be conducted. It is advantageous to implement and explain the internal control at the beginning to avoid confusion. This is also to reduce the possibility of the feeling of resentment on the part of the employees due to changing policies.