Q.Anil runs a small retail shop with three staff members. At present, the same salesperson who receives cash from customers also enters the day's collection into the cash book, and personally deposits the money in the bank at the end of the week. Anil has noticed small, unexplained shortages in cash over the last few months. As a student of auditing, suggest a sound internal check system for Anil's cash receipts, and explain why the current arrangement is weak. (This is supplementary practice content — the real Semester II paper for this unit is a 2-mark SAQ + 3-mark SAQ + 5-mark Descriptive mix, not a case-analysis format; Case Problems here build the deeper apply-the-rule reasoning the shorter formats cannot test.)

Letting one person receive, record, and bank cash unsupervised is the exact opposite of segregation of duties, which is why shortages can go unexplained for months.

Apply the standard cash-receipts internal check checklist from Section e directly to Anil's shop.

Why the current arrangement is weak. Anil's present system violates the single most important feature of internal check: segregation of duties (Section a and b). The same salesperson (i) receives the cash from customers, (ii) records it in the cash book, and (iii) eventually banks it — a complete, unsupervised, end-to-end control over the transaction. With no one else's work cross-checking hers at any stage, she (or anyone in her position) could under-record a sale, pocket the difference, and there would be no automatic point at which the shortfall gets flagged. Compounding this, cash is banked only weekly, not daily — meaning collected cash sits, unbanked and largely unverified, for up to six days, giving ample opportunity to 'borrow' from or short-change the till before it is ever reconciled against a bank record.

A sound internal check system for Anil's shop, applying the standard checklist for cash receipts (Section e):

1. Segregate duties, even with only three staff: one salesperson receives and issues a receipt for the cash; a second staff member independently enters the day's collections into the cash book from the receipt counterfoils (not from the first salesperson's own say-so); Anil himself (or a third staff member) handles banking, so no single person controls the entire chain.
2. Issue serially pre-numbered receipts for every sale, so a missing or out-of-sequence receipt number is immediately visible.
3. Bank the day's collections daily, in full and unaltered — never let cash accumulate for a week before being deposited, and never pay any expense directly out of the day's takings before banking.
4. Reconcile independently: at the end of each day (or at least each week), Anil personally compares the total per the receipt counterfoils, the cash book entry, and the actual bank pay-in slip — done by someone OTHER than whoever received and recorded the cash.
5. Conduct occasional surprise cash counts, at unannounced times, to confirm the physical cash on hand matches what the books show at that moment.

Even with only three staff, dividing the receive/record/bank functions across different people, combined with daily banking and periodic independent reconciliation, would very likely have surfaced Anil's shortages far sooner — and would make them much harder to repeat undetected going forward.