Internal Controls

Full Answer Section

1. Segregation of Duties: Separating critical tasks (e.g., order processing vs. cash handling) reduces the risk of errors or fraud. More relevant in brick-and-mortar stores due to physical cash handling.
2. Physical, Mechanical, and Electronic Controls: These safeguard assets and data. Online retail heavily relies on electronic controls for data security and access restrictions. Brick-and-mortar stores might use physical security measures like cash registers and security cameras.
3. Independent Internal Verification: Regular reviews by independent parties ensure the effectiveness of controls. Both online and brick-and-mortar businesses benefit from internal audits to identify control weaknesses.
4. Documentation Procedures: Written policies and procedures ensure consistency and compliance. Both models benefit from documented procedures for order processing, inventory management, and returns.
5. Human Resource Controls: Hiring qualified personnel, providing training, and promoting ethical behavior are essential for effective control activities. Both models require well-trained staff to handle customer interactions and adhere to company policies.

• Online Retail:
  • Establishment of Responsibility:In the digital realm, clear task ownership is critical for managing online stores, warehouses, and customer service functions, especially with geographically dispersed teams.
  • Physical, Mechanical, and Electronic Controls:Online retail heavily relies on robust cybersecurity measures to protect customer data (credit cards, personal information) and prevent online fraud (e.g., payment processing, data encryption).
• Brick-and-Mortar Retail:
  • Segregation of Duties:Cash handling is a significant risk area. Separating cashiers from inventory management or bookkeeping reduces the risk of theft or embezzlement.
  • Physical, Mechanical, and Electronic Controls:Physical security measures like cash registers with limited access, security cameras, and inventory control systems are crucial for deterring theft and shrinkage (loss of inventory).

• Online retail operates in a virtual environment where physical controls are less applicable. Robust electronic controls and clear task ownership become paramount.
• Brick-and-mortar stores have a higher emphasis on physical security due to cash handling and the presence of physical inventory. Segregation of duties for cash-related tasks mitigates theft risks.

Sample Answer

Six Principles of Control Activities and Their Relevance in Retail

Control activities are the policies and procedures implemented within an organization to ensure its objectives are met and risks are mitigated. Here are the six principles of control activities and a discussion of their relevance in online vs. brick-and-mortar retail:

1. Establishment of Responsibility: Clearly assigning responsibility for each task minimizes confusion and ensures accountability. This is crucial in both online and brick-and-mortar retail.