Ramona’s Clothing is a retail store specializing in women’s clothing. The store has established a liberal return policy for the holiday season

Ramona’s Clothing 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 under $75. If the item is more than $75, 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 Ramona’s Clothing have reached an all-time high. There are a large number of returns under $75 without receipts.

a. How can salesclerks employed at Ramona’s Clothing use the store’s return policy to steal money from the cash register?

b. What internal control weaknesses do you see in the return policy that make cash thefts easier?

c. Would issuing a store credit in place of a cash refund for all merchandise returned without a receipt reduce the possibility of theft? List some advantages and disadvantages of issuing a store credit in place of a cash refund.

d. Assume that Ramona’s Clothing is committed to the current policy of issuing cash refunds without a receipt. What changes could be made in the store’s procedures regarding customer refunds to improve internal control?

Answer:

a. The salesclerks could steal money by writing phony refunds and pocketing the cash supposedly refunded to these fictitious customers.

b. Ramona’s Clothing suffers from inadequate separation of responsibilities for related operations because the clerks issue refunds and restock all merchandise. In addition, there is a lack of proofs and security measures because the supervisors authorize returns two hours after they are issued.

c. A store credit for any merchandise returned without a receipt would reduce the possibility of theft of cash. In this case, a clerk could only issue a phony store credit rather than taking money from the cash register. A store credit is not as tempting as cash. In addition, salesclerks could only use a few store credits to purchase merchandise for themselves without management getting suspicious.

An advantage of issuing a store credit for returns without a receipt is that the possibility of stealing cash is reduced. The store will also lose less revenue if customers must choose other store merchandise instead of receiving a cash refund. The overall level of returns/exchanges may be reduced because customers will not return an acceptable gift simply because they need cash more than the gift. The policy will also reduce the “cash drain” during the weeks immediately following the holidays, allowing Ramona’s Clothing to keep more of its money earning interest or use that cash to purchase spring merchandise or pay creditors.

A disadvantage of issuing a store credit for returns without a receipt is that preholiday sales might drop as gift-givers realize that the return policy has tightened. After the holidays, customers wanting to return items for cash refunds may be frustrated when they learn the store policy has changed. The ill will may reduce future sales. It may take longer to explain the new policy and fill out the paperwork for a store credit, lengthening lines at the return counter after the holidays. Salesclerks will need to be trained to apply the new policy and write up a store credit. Salesclerks also will need to be trained to handle the redemption of the store credit on future merchandise purchases.

d. The potential for abuse in the cash refund system could be eliminated if clerks were required to get a supervisor’s authorization for a refund before giving the customer the cash. The supervisor should authorize the refund only after seeing both the customer and the merchandise that is being returned.

An alternative would be to use security measures that detect a salesclerk attempting to ring up a refund and remove cash when a customer is not present at the sales desk. These security measures could include cameras or additional security personnel discreetly monitoring the sales desk.

Finally, an employee on the following work shift could be assigned the responsibility of restocking returned merchandise and reconciling the returns to a refund list for the department.