4. Internal controls over merchandise returns

It is very important to design good internal controls over merchandise returns as these transactions impact, directly or indirectly, such accounts as Cash, Inventory, Sales (through Sales Returns and Allowances), Cost of Goods Sold, Accounts Payable, Sales Taxes, etc. For example, two common register disbursement fraud schemes include false refunds and false voids.

In the case of a false refund, a fraud perpetrator creates a fictitious return and pockets cash, or the fraud perpetrator overstates the value of the return and pockets the difference.

In the case of false voids, a fraud perpetrator keeps a copy of the customer’s receipt at the time of sale and later (after the customer has left) uses it to create a fictitious void (i.e., as if the customer returned the merchandise).

Both fictitious returns and false voids can be difficult to prevent and detect, unless appropriate internal controls are put in place. Therefore, a business can implement the following controls (this is not an exhaustive list):

• Set a return policy.
• Make sure that customer service employees understand the return policy.
• Post the return policy near cash registers.
• Set physical control (e.g., security cameras) over valuable assets.
• Keep an appropriate level of cash in cash registers.
• Require receipts for all returned merchandise.
• Use pre-numbered documents (e.g., return slips, debit and credit memorandums).
• Require customers to sign return slips and place return slips in a special box.
• Require a manager to visit the return counter once every two-three hours to authorize the return slips.
• Require a manager to verify merchandise for quantity and quality and receipts for original purchases before approving refunds to customers.
• Set a limit on the authority of managers at different levels to accept returns (e.g., value or time period limits).
• Make sure there is a segregation of duties in various segments of the sales and purchase cycles.
• Instruct customer service clerks to place returned merchandise on the proper rack (on the selling floor) as soon as possible.
• Set an appropriate return policy for returns without original receipt. For instance, set a threshold (e.g., less than $10, cash refund, and $10 or more, a store credit).
• Do inventory counts frequently (i.e., full physical or cycle counts).
• Keep a separate purchase returns and allowances journal
• Set adequate year-end cut-off procedures for sale and purchase returns.
• Send monthly account statements to suppliers to verify balances.

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