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Chapter 7: Q15RQ (page 412)
What is a bank reconciliation?
Bank reconciliation is a statement used to adjust the balance of the bank account and company鈥檚 books.
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What are the steps taken to ensure control over purchases and payments by check?
Classifying bank reconciliation items
The following items could appear on a bank reconciliation:
a. Outstanding checks, \(670.
b. Deposits in transit, \)1,500.
c. NSF check from customer, no. 548, for \(175.
d. Bank collection of note receivable of \)800, and interest of \(80.
e. Interest earned on bank balance, \)20.
f. Service charge, \(10.
g. The business credited Cash for \)200. The correct amount was \(2,000.
h. The bank incorrectly decreased the business鈥檚 account by \)350 for a check written
by another business.
Classify each item as (1) an addition to the book balance, (2) a subtraction from the
book balance, (3) an addition to the bank balance, or (4) a subtraction from the bank
balance.
Question: How does the Sarbanes-Oxley Act relate to internal controls?
Applying internal control over cash payments by check
A purchasing agent for Franklin Office Supplies receives the goods that he purchases
and also approves payment for the goods.
Requirements
1. How could this purchasing agent cheat his company?
2. How could Franklin avoid this internal control weakness?
Correcting internal control weaknesses
Each of the following situations has an internal control weakness.
a. Upside-Down Applications develops custom programs to customers鈥� specifications.
Recently, development of a new program stopped while the programmers
redesigned Upside-Down鈥檚 accounting system. Upside-Down鈥檚 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鈥檚 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.
Requirements
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.
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