Harbour Light Café: Internal Control Weaknesses
Harbour Light Café is a small owner-operated café. All cash sales are rung on one till, but the owner, Mere, often serves customers and takes cash. At the end of each day, the duty manager counts the till and puts cash in a locked drawer in the office. The office key is kept under the till. Bank deposits are made once a week by the duty manager. Food and drink purchases are ordered by the chef by phone; invoices arrive by email and are paid by Mere without matching to delivery dockets. Stocktake is done once a year. In the last quarter, cash sales have fallen 8% while customer numbers are steady, and two suppliers have queried unpaid invoices. Mere suspects staff theft but is unsure.
1. Identify three internal control weaknesses in Harbour Light Café and explain the risk each creates.
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- Mere both serves customers and handles cash, with no segregation from recording. Risk: cash can be removed and sales not recorded, and errors or theft are hard to detect.
- Cash is kept in a locked drawer with the key under the till. Risk: anyone can access cash; a burglary or staff theft could go unnoticed.
- Banking is done weekly. Risk: large amounts of cash accumulate, increasing loss if stolen and making daily reconciliation harder.
- Chef orders by phone and Mere pays invoices without matching delivery dockets. Risk: payment for goods not received, duplicate payment, or fraudulent invoices.
- Stocktake is annual. Risk: stock theft or waste is not detected promptly.
2. Recommend one specific control for each weakness you identified and justify one recommendation in terms of cost versus benefit.
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Controls: (1) separate cash handling from cash recording-use a POS system and have a second person reconcile the till; (2) install a safe with restricted access and remove the key from under the till; (3) bank daily or use a secure courier; (4) require a delivery docket and match it to the invoice before payment; (5) perform monthly stocktakes of high-value items.
Justification for daily banking: it costs staff time and possibly courier fees, but it reduces the cash held on site. Given the 8% fall in cash sales, even a modest theft loss may exceed the cost of daily banking, and it improves the audit trail.
3. Mere wants to install a $4,500 camera system. Explain how she should decide whether this is worthwhile, using the information given.
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She should compare the $4,500 cost with the expected reduction in losses. She needs an estimate of quarterly cash sales; if cash sales are $60,000, an 8% fall is $4,800, so stopping the loss could recover the cost in about one quarter. But she should first check whether the fall is due to theft, till errors, or lower spending per customer. Cheaper controls such as daily banking, segregation of duties, and delivery-docket matching may be more cost-effective. She should also consider privacy and staff morale. The decision is a cost–benefit judgement, not just a cost calculation.