INTERNAL CONTROL AND AUDIT

Internal Control & Audit



Internal Control and Audit

Introduction

The report titled Lawrence's Brookes Theatre's problems is formulated to highlight the various issues the management of the theatre is facing and its implications. The purpose of the report is to highlight the various weaknesses in the internal controls of the theatre and recommends various solutions that management can undertake to ameliorate the situation.

Background

Lawrence's Brookes Theatre was a single-location four-screen theatre located in a small town in West Sussex. It was bought a year ago by Lawrence McCarthy and subsequently hired Bob Jefferson, his nephew, to manage it. Mr. Lawrence was concerned, however, because the theatre was not as profitable as he had thought it would be. He suspected the theatre had some control problems and asked Pat Flanders, an accounting lecturer at a college in the adjacent town, to study the situation.

Issues

The initial findings of Pat Flanders are:

Customers purchased their tickets at one of two ticket booths located at the front of the theatre. The theatre used general admission (not assigned) seating. The tickets were colour-coded to indicate which movie the customer wanted to see. The tickets were also dated and stamped “valid on day of sale only”. The tickets at each price (adult, child, matinée, evening) were pre-numbered serially, so that the number of tickets sold each day at each price for each movie could be determined by subtracting the first serial number from the end serial number of tickets sold.

The amounts of cash collected were counted daily and compared with the total value of tickets sold. The cash counts revealed, almost invariably, less cash than the amounts that should have been collected. The discrepancies were usually small, less than the £10 per cashier. However, on one day, two weeks before Pat's study, one cashier was short by almost £100.

Just inside the theatre's front doors was a lobby with a refreshment stand. Pat spent time observing the refreshment stand operations and he noted that most of the stand's attendants were young, probably of high school or college age. They seem to know many of the customers, a majority of whom were of similar ages, which was not surprising given the theatre's small-town location. But the familiarity concerned Pat because he had also observed several occasions where the stand's attendants either failed to collect cash from the customers or failed to ring up the sale on the cash register.

Customers entered the screening rooms through a turnstile manned by an attendant who separated the ticket and placed part of it in a locked “stub box”. Test counts of customers entering and leaving the theatre did not reconcile either with the number of ticket sales or the stub counts.

Pat found evidence of two specific problems. First, he found a few tickets of the wrong colour or with the wrong dates in the ticket stub boxes. And second, he found a sometimes significant number of free theatre passes with Bob Jefferson's signature on ...