Honeybee Hippie is a retail store specializing in women's clothing. The store has established a liberal return policy for the holiday season in order to encourage gift purchases. Any item purchased during November and December may be returned through January 31, with a receipt, for cash or exchange. If the customer does not have a receipt, cash will still be refunded for any item less than $200. If the item is more than $200, a check is mailed to the customer.
Whenever an item is returned, a store clerk completes a return slip, which the customer signs. The return slip is placed in a special box. The store manager visits the return counter approximately once every two hours to authorize the return slips. Clerks are instructed to place the returned merchandise on the proper rack on the selling floor as soon as possible.
This year, returns at Honeybee Hippie reached an all-time high. There are a large number of returns of less than $200 without receipts.
1. How can sales clerks employed at Honeybee Hippie use the store's return policy to steal money from the cash register?
Let's address each part of the scenario involving Honeybee Hippie and its return policy:
1. Potential for Sales Clerks to Steal Money
Sales clerks can exploit the store's return policy to steal money by processing fake returns. Here’s how they might do it:
No-Receipt Returns: For items under $200, clerks can pretend to accept returns without a receipt, issue a cash refund, and then take the money for themselves. Since the policy allows for cash refunds without receipts, it’s easier to manipulate the system.
2. Internal Control Weaknesses
Several internal control weaknesses make cash theft easier under the current return policy:
Infrequent Manager Oversight: The store manager only checks the return slips every two hours, which gives clerks ample time to process fraudulent returns and hide their tracks.
Immediate Restocking: Clerks are instructed to return items to the selling floor immediately. This means there’s no centralized check to ensure the returned items are actually back in inventory, facilitating fake returns.
3. Advantages of Store Credit Over Cash Refunds
All the following are advantages of issuing store credit rather than cash refunds, except:
Increased Sales: Customers with store credit are likely to make additional purchases.
Prevention of Fraud: Store credit makes it harder for employees to commit theft.
The exception is;
4. Improvements to Internal Controls
Honeybee Hippie Fashions could consider the following changes to improve internal controls, except:
Implementing Store Credit for Returns without Receipts: Instead of cash refunds, store credit can be issued for returns without receipts to reduce cash handling and theft.
Increasing Managerial Oversight: Managers could increase the frequency of their checks or implement real-time monitoring to better detect fraudulent activities.
The exception is:
Summary
To strengthen internal controls and reduce theft, Honeybee Hippie should require receipts for all returns, shift to issuing store credits instead of cash for no-receipt returns, and increase managerial oversight of the return process. Implementing these changes will create a more robust control environment and deter fraudulent activities.
Whenever an item is returned, a store clerk completes a return slip, which the customer signs. The return slip is placed in a special box. The store manager visits the return counter approximately once every two hours to authorize the return slips. Clerks are instructed to place the returned merchandise on the proper rack on the selling floor as soon as possible.
This year, returns at Honeybee Hippie reached an all-time high. There are a large number of returns of less than $200 without receipts.
1. How can sales clerks employed at Honeybee Hippie use the store's return policy to steal money from the cash register?
Answer: By writing phony refunds and pocketing the cash.
2. What internal control weaknesses do you see in the return policy that make cash thefts easier?
Answer: Only one employee has custody of valuable assets.
3. All of the following are advantages of issuing a store credit rather than a cash refund except:
Answer: Store credits will keep clerks from committing fraud.
4. All of the following are changes that Honeybee Hippie Fashions could make to improve the internal controls for issuing cash refunds without a receipt except:
2. What internal control weaknesses do you see in the return policy that make cash thefts easier?
Answer: Only one employee has custody of valuable assets.
3. All of the following are advantages of issuing a store credit rather than a cash refund except:
Answer: Store credits will keep clerks from committing fraud.
4. All of the following are changes that Honeybee Hippie Fashions could make to improve the internal controls for issuing cash refunds without a receipt except:
Answer: Give the customers a choice of cash refunds or exchange credit.
Expert Explanation
1. Potential for Sales Clerks to Steal Money
Sales clerks can exploit the store's return policy to steal money by processing fake returns. Here’s how they might do it:
Fake Returns with Receipts: Clerks could take legitimate receipts from discarded or uncollected receipts and process returns for those items. They then pocket the cash.
No-Receipt Returns: For items under $200, clerks can pretend to accept returns without a receipt, issue a cash refund, and then take the money for themselves. Since the policy allows for cash refunds without receipts, it’s easier to manipulate the system.
2. Internal Control Weaknesses
Several internal control weaknesses make cash theft easier under the current return policy:
Cash Refunds without Receipts: Allowing cash refunds without a receipt increases the risk of fraudulent returns.
Infrequent Manager Oversight: The store manager only checks the return slips every two hours, which gives clerks ample time to process fraudulent returns and hide their tracks.
Immediate Restocking: Clerks are instructed to return items to the selling floor immediately. This means there’s no centralized check to ensure the returned items are actually back in inventory, facilitating fake returns.
3. Advantages of Store Credit Over Cash Refunds
All the following are advantages of issuing store credit rather than cash refunds, except:
Reduced Cash Handling: Store credit reduces the amount of cash handled, lowering the risk of theft.
Increased Sales: Customers with store credit are likely to make additional purchases.
Prevention of Fraud: Store credit makes it harder for employees to commit theft.
The exception is;
Immediate Customer Satisfaction: While cash refunds offer immediate satisfaction, store credit might not be as satisfying to some customers.
4. Improvements to Internal Controls
Honeybee Hippie Fashions could consider the following changes to improve internal controls, except:
Requiring Receipts for All Returns: This would significantly reduce the potential for fraudulent returns.
Implementing Store Credit for Returns without Receipts: Instead of cash refunds, store credit can be issued for returns without receipts to reduce cash handling and theft.
Increasing Managerial Oversight: Managers could increase the frequency of their checks or implement real-time monitoring to better detect fraudulent activities.
The exception is:
Reducing Return Authorization by Clerks: Allowing clerks less discretion in return authorization can help, but it’s more effective to focus on ensuring proper oversight and verification processes are in place.
Summary
To strengthen internal controls and reduce theft, Honeybee Hippie should require receipts for all returns, shift to issuing store credits instead of cash for no-receipt returns, and increase managerial oversight of the return process. Implementing these changes will create a more robust control environment and deter fraudulent activities.
