Identifying internal control weakness in cash receipts
Pendley Productions makes all sales on credit. Cash receipts arrive by mail. Larry
Chipello, the mailroom clerk, opens envelopes and separates the checks from the
accompanying remittance advices. Chipello forwards the checks to another employee,
who makes the daily bank deposit but has no access to the accounting records.
Chipello sends the remittance advices, which show cash received, to the accounting
department for entry in the accounts. Chipello’s only other duty is to grant sales
allowances to customers. (A sales allowance decreases the customer’s account receivable.)
When Chipello receives a customer check for $575 less a $45 allowance, he records the
sales allowance and forwards the document to the accounting department.
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?
The amount of cash shown in the ledger is $530.
Internal controls are those controls that affect the internal environment of the company. Internal controls enhance the smooth working of the company.
In the given situation, the missing internal control is the segregation of duties because the duties between the accounting department and clerk are not followed. The lack of duties leads to weakness in internal control.
The accountant must record the sale allowances, and all the duties of the accountant are clearly defined by the company. Good internal control on the segregation of duties leads to fewer chances of fraud and reduces risks for the company.
The amount is shown in the cash ledger
Hence, the amount of cash shown in the ledger of cash receipt is $530.
Preparing a bank reconciliation
The Cash account of Guard Dog Security Systems reported a balance of $2,540 at December 31, 2018. There were outstanding checks totaling $400 and a December 31 deposit in transit of $100. The bank statement, which came from Park Cities Bank, listed the December 31 balance of $3,340. Included in the bank balance was a collection of $510 on account from Brendan Ballou, a Guard Dog customer who pays the bank directly. The bank statement also shows a $30 service charge and $20 of interest revenue that Guard Dog earned on its bank balance. Prepare Guard Dog’s bank reconciliation for December 31.
Fill in the missing information.
a. The vendor ships the inventory and sends a(n) __________ back to the purchaser.
b. After approving all documents, the purchaser sends a(n) __________ to the vendor.
c. When ordering merchandise inventory, the purchaser sends a(n) __________ to the vendor.
d. The purchaser receives the inventory and prepares a(n) __________.
Question: Understanding bank account controls
Answer the following questions about the controls in bank accounts:
1. Which bank control protects against forgery?
2. Which bank control reports the activity in the customer’s account each period?
3. Which bank control confirms the amount of money put into the bank account?
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