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Chapter 7: Q12E (page 414)

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鈥檚 cash sales.

d. The employee who signs checks need not examine the payment packet because he is confident the amounts are correct.

Requirements

1. Define internalcontrol.

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.

Short Answer

Expert verified
  1. The situation relates to Weakness in internal control.
  2. The situation relates to Weakness in internal control.
  3. The situation relates to Weakness in internal control.
  4. The situation relates to Weakness in internal control.

Step by step solution

01

Step-by-Step SolutionStep 1: Definition of internal control

Internal controls mean to detect the errors from the management of the company.

02

Internal control

Internal control is a control that controls the internal activities of the company. Internal control is also known as achieving the company鈥檚 objective, reliable financial reports, etc. Internal control is also used to increase the efficiency of the company鈥檚 employees.

03

Rule requires the testing of internal control

The Sarbanes-Oxley Act requires that the internal control must be tested by external auditors.

04

Strength or weakness

  1. In this part, the given situation is a weakness of the company. Because of this, the managers assign all the duties to the accounting department. This rule of the separation of duties cannot be followed properly.
  2. This situation is also a weakness for the company because the accounting department orders merchandise without the consent of the purchasing department.
  3. This situation is also a weakness for the company because, in this, the sales clerk creates the opportunity the steal.
  4. This situation is also a weakness for the company because not examining the checks creates human errors.

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Most popular questions from this chapter

What is separation of duties?

Levon Helm was a kind of one-person mortgage broker. He would drive around Tennessee looking for homes that had second mortgages, and if the criteria were favorable, he would offer to buy the second mortgage for 鈥渃ash on the barrelhead.鈥� Helm bought low and sold high, making sizable profits. Being a small operation, he employed one person, Cindy Patterson, who did all his bookkeeping. Patterson was an old family friend, and he trusted her so implicitly that he never checked up on the ledgers or the bank reconciliations. At some point, Patterson started 鈥渂orrowing鈥� from the business and concealing her transactions by booking phony expenses. She intended to pay it back someday, but she got used to the extra cash and couldn鈥檛 stop. By the time the scam was discovered, she had drained the company of funds that it owed to many of its creditors. The company went bankrupt, Patterson did some jail time, and Helm lost everything

Requirements

  1. What was the key control weakness in this case?
  2. Many small businesses cannot afford to hire enough people for adequate separation of duties. What can they do to compensate for this?

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 custodianreplenished the fund and recorded the expenses.

Prepare the journal entries.

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?

Evaluating internal control over cash payments Gary鈥檚 Great Cars purchases high-performance auto parts from a Nebraska vendor. Dave Simon, the accountant for Gary鈥檚, verifies receipt of merchandise and then prepares, signs, and mails the check to the vendor.

Requirements

1. Identify the internal control weakness over cash payments.

2. What could the business do to correct the weakness?
See all solutions

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