Identifying internal control weakness in cash receipts
Seawind Productions makes all sales on credit. Cash receipts arrive by mail. Justin
Broadway, the mailroom clerk, opens envelopes and separates the checks from
the accompanying remittance advices. Broadway forwards the checks to another
employee, who makes the daily bank deposit but has no access to the accounting
records. Broadway sends the remittance advices, which show cash received, to
the accounting department for entry in the accounts. Broadway’s only other duty
is to grant sales allowances to customers. (A sales allowance decreases the customer’s
account receivable.) When Broadway receives a customer check for $600 less a
$30 allowance, he records the sales allowance and forwards the document to the
1. Identify the internal control weakness in this situation.
2. Who should record sales allowances?
3. What is the amount that should be shown in the ledger for cash receipts?
In the given situation weakness of internal control is the separation of duties.
The separation of duties means dividing the responsibilities between two or more employees.
In the given situation, the weakness is of separation of the duties because the duties of the employees' responsibilities are not clearly defined. Broadway must grant sales allowance, but he performs other duties also.
Broadway has to record sales allowance because this is the duty of Broadway to record sales allowance.
In the ledger of cash receipts, the cash shown is $570 because the $30 sales allowance is deducted from the sales allowance.
Controlling petty cash Just Hangin’ Night Club maintains an imprest petty cash fund of $150, which is under the control of Sandra Morgan. At March 31, the fund holds $14 cash and petty cash tickets for office supplies, $128, and delivery expense, $15.
1. Explain how an imprest petty cash system works.
2. Journalize the establishment of the petty cash fund on March 1 and the replenishing of the fund on March 31.
3. Prepare a T-account for Petty Cash and post to the account. What is the balance of the Petty Cash account at all times?
The following petty cash transactions of Green Golf Equipment occurred in May:
May 1 Established a petty cash fund with a $200 balance.
31 The petty cash fund has $18 in cash and $180 in petty cash tickets that were issued to pay for Office Supplies ($81), Delivery Expense ($36), Postage Expense ($54), and Miscellaneous Expense ($9).
The petty cash custodian replenished the fund and recorded the expenses.
Prepare the journal entries.
Evaluating internal control over cash payments Gary’s Great Cars purchases high-performance auto parts from a Nebraska vendor. Dave Simon, the accountant for Gary’s, verifies receipt of merchandise and then prepares, signs, and mails the check to the vendor.
1. Identify the internal control weakness over cash payments.
2. What could the business do to correct the weakness?
Applying internal control over cash receipts Sandra Kristof sells furniture for McKinney Furniture Company. Kristof has financial problems and takes $650 that she received from a customer. She rang up the sale through the cash register. What will alert Megan McKinney, the controller, that something is wrong?
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