Correcting internal control weaknesses
Each of the following situations has an internal control weakness.
a. Upside-Down Applications develops custom programs to customers’ specifications.
Recently, development of a new program stopped while the programmers
redesigned Upside-Down’s accounting system. Upside-Down’s accountants could
have performed this task.
b. Norma Rottler has been your trusted employee for 24 years. She performs all cashhandling
and accounting duties. Norma just purchased a new luxury car and a new
home in an expensive suburb. As owner of the company, you wonder how she
can afford these luxuries because you pay her only $30,000 a year and she has no
source of outside income.
c. Izzie Hardwoods, a private company, falsified sales and inventory figures in order
to get an important loan. The loan went through, but Izzie later went bankrupt and
could not repay the bank.
d. The office supply company where Pet Grooming Goods purchases sales receipts
recently notified Pet Grooming Goods that its documents were not prenumbered.
Howard Mustro, the owner, replied that he never uses receipt numbers.
e. Discount stores such as Cusco make most of their sales in cash, with the remainder
in credit card sales. To reduce expenses, one store manager ceases purchasing
fidelity bonds on the cashiers.
f. Cornelius’s Corndogs keeps all cash receipts in an empty box for a week because
the owner likes to go to the bank on Tuesdays when Joann is working.
1. Identify the missing internal control characteristics in each situation.
2. Identify the possible problem caused by each control weakness.
3. Propose a solution to each internal control problem.
The weakness of the assignment of responsibilities can be removed by assigning the right responsibility to the right person.
Separation of duties means dividing the responsibilities between two persons.
Match the accounting terminology to the definitions.
1. Sarbanes-Oxley Act
2. Internal control
4. Separation of duties
5. Internal auditors
a. Organizational plan and all the related measures adopted by an entity to safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting records.
b. Employees of the business who ensure that the company’s employees are following company policies and meeting legal requirements and that operations are running efficiently.
c. Rearranging plain-text messages by a mathematical process—the primary method of achieving security in e-commerce.
d. Requires companies to review internal control and take responsibility for the accuracy and
completeness of their financial reports.
e. Dividing responsibilities between two or more people.
Fill in the missing information concerning how companies control cash received by mail.
a. The ________ opens the mail and sends customer checks to the treasurer.
b. The ________ deposits the customer checks in the bank.
c. The ________ uses the remittance advices to record the journal entries for cash receipts.
d. The ________ compares the bank deposit to the journal entry for cash receipts.
Understanding the Sarbanes-Oxley Act and identifying internal control strengths and weaknesses. The following situations suggest a strength or a weakness in internal control.
a. Top managers delegate all internal control procedures to the accounting department.
b. Accounting department staff (or the bookkeeper) orders merchandise and approves invoices for payment.
c. Cash received over the counter is controlled by the sales clerk, who rings up the sale and places the cash in the register. The sales clerk matches the total recorded by the register to each day’s cash sales.
d. The employee who signs checks need not examine the payment packet because he is confident the amounts are correct.
1. Define internal control.
2. The system of internal control must be tested by external auditors. What law or rule requires this testing?
3. Identify each item in the list above as either a strength or a weakness in internal control, and give your reason for each answer.
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