INTERNAL CONTROL AND ETHICS owner of Parys Traders suspects that the staff is stealing stock. He is confident that it tot customers because of the security cameras that were installed. QUIRED: 2.1 Provide a reason why the owner suspect that stock is being stolen. 2.2 Suggest TWO internal control measures that the owner can employ to resolve this problem 2.3 You are the manager in a business. It was brought to your attention that certain employees were receiving gifts and discounts from suppliers in exchange for granting them contracts. Provide THREE points that you would include in the business code of ethics which will make it clear to the staff as to what is acceptable and unacceptable conduct. TOTAL MARKS:

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### 2.1 Reason for Suspecting Stock Theft

The owner suspects that stock is being stolen because despite the security cameras covering the areas where customers are served, the **discrepancy in stock levels** indicates missing inventory. This discrepancy implies that some stock is unaccounted for despite recorded sales, which strongly suggests that the staff might be taking items without authorization.

*Hint: When stock records do not match physical inventories, it is often a sign of either mismanagement or theft.*

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### 2.2 Two Internal Control Measures

To mitigate and eventually resolve the problem of stock theft, the owner can employ the following internal control measures:

1. **Implement Regular Inventory Audits and Reconciliation**  
   By conducting frequent physical counts and comparing these with the recorded levels in the inventory management system, discrepancies can be quickly identified. For example, performing regular audits ensures that any loss is spotted early. This control can be summarized as ensuring that
   $$
   \text{Physical Count} \approx \text{Recorded Inventory}.
   $$

2. **Strengthen Access Controls and Segregation of Duties**  
   Limit access to stockrooms and create a segregation of tasks among employees, so that no single individual has control over all facets of the inventory process. For example, one employee might be allowed to record shipments while another handles the physical custody of the stock. This dual control minimizes the opportunity for theft.

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### 2.3 Three Points for the Business Code of Ethics

As the manager, to address the issue of employees receiving gifts or discounts from suppliers in exchange for contracts, the business code of ethics should explicitly include the following points:

1. **Zero Tolerance for Bribery and Conflicts of Interest**  
   It should be stated clearly that any form of bribery or acceptance of gifts or discounts that could be seen as influencing business decisions is strictly forbidden. For instance, employees must disclose any potential conflicts of interest and refrain from accepting undue favors. This can be expressed as:
   $$
   \text{No gifts} \neq \text{improper influence}.
   $$

2. **Mandatory Disclosure of Relationships with Suppliers**  
   Employees must be required to disclose any personal or financial relationships with suppliers. This full transparency ensures that the process of awarding contracts remains impartial and based solely on merit, not personal gain.

3. **Clear Consequences for Ethical Violations**  
   The code should define specific disciplinary actions for violations of the ethical policies, including termination of employment or legal action if necessary. This ensures that all employees understand the severity of breaching ethical standards. For example:
   $$
   \text{Violation of code} \Rightarrow \text{Disciplinary action}.
   $$

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This step-by-step approach outlines the reasons behind suspecting theft, the preventive measures to control stock, and the ethical guidelines needed to maintain integrity in business dealings.
**2.1 Reason for Suspecting Stock Theft** The owner suspects stock theft because the physical inventory doesn't match the recorded levels, indicating missing items despite security cameras. **2.2 Two Internal Control Measures** 1. **Regular Inventory Audits:** Conduct frequent counts to spot discrepancies. 2. **Segregation of Duties:** Assign tasks so no one controls everything, reducing theft opportunities. **2.3 Three Points for the Business Code of Ethics** 1. **No Bribery:** Prohibit accepting gifts or discounts that influence decisions. 2. **Disclosure:** Require employees to report relationships with suppliers. 3. **Consequences:** Define strict penalties for ethical violations to maintain integrity.

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