What Are the Internal Control Risks for a High-Volume Retail Store?

High-volume retail sales generate large amounts of cash, credit and debit card payments, checks and money orders. Cash is an easily negotiated liquid asset, as are checks. Credit and debit card information is vulnerable to exploitation and misuse. High-volume retail establishments are most vulnerable to employee theft at the point of sale. There are also risks from dishonest customers who attempt to switch price tags or conceal goods when checking out.

Retail fraud generally is committed at the point of sale. There are a number of schemes that a reasonably skilled cashier or supervisor can employ to disguise thefts. One of the most common methods is to either undercharge or overcharge a customer. An undercharge is accomplished by not ringing up all or part of a sale, charging the customer the full amount and keeping the undocumented funds. The other method is to overcharge a customer and pocket the amount over the actual value of the sale. Both schemes are off the record, in the sense that sales registers or terminals do not record the cashier's behavior. One appropriate control against this is to have sales terminals that show the customer each item's cost during the transaction.

Unrecorded transactions can be processed if an employee is able to leave the cash drawer open. Sales terminals that prevent cash drawers from remaining open are the best solution for this type of scheme. Falsely voiding a sale and pocketing the money is another common scheme. This can be controlled by a strict policy of management authorization for voiding a sale.

Management personnel with computer skills may program sales terminals or cash registers to calculate sales tax slightly above the legal rate. High sales volume can yield large amounts of excess cash to be removed later. Many terminals and cash register systems have an offline code or mode that can be accessed for training purposes. A manager with this capability could effectively conceal the theft of proceeds from countless transactions. This is controlled by an effective audit of sales and transactions levels. Low numbers in comparison with other terminals is one indicator of a possible problem. Higher than average promotional and coupon price reductions than others and unauthorized returns are all red flags when they exceed the acceptable and average range of frequency. This is countered by monitoring and auditing sales.

The higher risks at the point of sale do not diminish the requirement that cash is handled appropriately when collected. Segregated duties should be established with different employees delegated to receive, count and deposit cash, reconcile sales receipts, record payments and secure funds. Whenever possible, rotate supervisory and management personnel who work closely with cashiers. Be alert to situations suggesting collusion between employees. Without exception, each cashier should have a separate cash drawer to be reconciled and balanced at the end of shift. Conduct pre-employment background checks on all employees who will be allowed to handle cash.