Correcting internal control weaknesses
Each of the following situations has an internal control weakness.
a. Jade Applications has decided that one way to cut costs in the upcoming year is to
fire the external auditor. The business believes that the internal auditor should be
able to efficiently monitor the company’s internal controls.
b. In an effort to minimize the amount of paperwork, Ross Homes has decided that it
will not keep copies of customer invoices related to sales revenue. Ross believes that
this effort will minimize the amount of data storage the company will have to pay for.
c. Elle Bee, a trusted employee for many years, has never taken a vacation. The owner
believes that he’s lucky that she is so committed to her job.
d. The Medicine Chest Company keeps a small petty cash fund to handle small cash
transactions. Because no one wants to volunteer to be the custodian, the business
manager has decided that all employees should have access to the petty cash. She
figures that as long as each employee fills out a petty cash ticket, then there are
proper controls in place.
e. Due to the cost of maintaining the security cameras, Wings and More has decided
that it will remove the cameras that monitor the cash register.
f. Bryan Miller, manager of Hardware Emporium, prides himself on hiring
exceptionally skilled employees who need no training to do their jobs.
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.
To make books more accurate the company needs to hire an external auditor.
Internal controls are those controls that affect the internal environment of the company. Internal controls enhance the smooth working of the company.
: Identifying timing differences related to a bank reconciliation
For each timing difference listed, identify whether the difference would be reported on
the book side of the reconciliation or the bank side. In addition,
identify whether the difference would be an addition or subtraction.
a. Deposit in transit
b. Bank collection
c. Debit memorandum from bank
d. EFT cash receipt
e. Outstanding checks
f. $1,000 deposit erroneously recorded
by the bank as $100
g. Service charges
h. Interest revenue
i. $2,500 cash payment for rent
expense erroneously recorded by
the business as $250
j. Credit memorandum from bank
Accounting for petty cash transactions
Suppose that on June 1, Rockin’ Gyrations, a disc jockey service, creates a petty cash
fund with an imprest balance of $300. During June, Michael Martell, fund custodian,
signs the following petty cash tickets:
Ticket Number Item Amount
1 Postage for package received $ 30
2 Office party 25
3 Two boxes of stationery 20
4 Printer cartridges 15
5 Business dinner 65
On June 30, prior to replenishment, the fund contains these tickets plus cash of $140.
The accounts affected by petty cash payments are Office Supplies, Entertainment
Expense, and Postage Expense.
1. On June 30, how much cash should this petty cash fund hold before it is replenished?
2. Journalize all required entries to (a) create the fund and (b) replenish it. Include explanations.
3. Make the entry on July 1 to increase the fund balance to $325. Include an explanation
Identifying internal controls. Consider each situation separately. Identify the missing internal control procedure from these characteristics:
• Assignment of responsibilities
• Separation of duties
• Electronic devices
• Other controls (specify)
a. While reviewing the records of Quality Pharmacy, you find that the same Team member orders merchandise and approves invoices for payment.
b. Business is slow at Amazing Amusement Park on Tuesday, Wednesday, and Thursday nights. To reduce expenses, the business decides not to use a ticket taker on those nights. The ticket seller (cashier) is told to keep the tickets as a record of the number sold.
c. The same trusted team member has served as a cashier for 12 years.
d. When business is brisk, Fast Mart deposits cash in the bank several times during the day. The manager at one store wants to reduce the time employees spend delivering cash to the bank, so he starts a new policy. Cash will build up over weekends, and the total will be deposited on Monday.
e. Grocery stores such as Convenience Market and Natural Foods purchase most merchandise from a few suppliers. At another grocery store, the manager decides to reduce paperwork. He eliminates the requirement that the receiving department prepare a receiving report listing the goods actually received from
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