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Chapter 7: Q1RQ (page 411)
What is internal control?
Internal control refers to the plans or rulesimplemented by the business entities to promote the efficiency of business operationsand prevent fraud.
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When are the only times the Petty Cash account is used in a journal entry?
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.
Preparing a bank reconciliation and journal entries
This problem continues the Canyon Canoe Company situation from Chapter 6.
Canyon Canoe Company has decided to open a new checking account at River
Nations Bank during March 2019. Canyon Canoe Company鈥檚 March Cash T-account
for the new cash account from its general ledger is as follows:
Cash鈥擱iver Nations Bank Checking Account
Balance
Deposit
Deposit
Deposit
Deposit
200
4,300
750
1,675
1,500
14,165
Mar. 1
2
13
20
27
Deposit
10,000
2,325
2,750
4,500
31 3,490
Mar. 2
4
9
14
21
Ck#101
Ck#102
Ck#103
Ck#104
Ck#105
175
300
28
30
Ck#106
Ck#107
Balance
Canyon Canoe Company鈥檚 bank statement dated March 31, 2019, follows:
Beginning Balance, March 1, 2019
Deposits and other credits:
Mar. 2
14
21
28
29 EFT Sport Shirts(1)
(1) Sport Shirts is a customer making a payment on account.
(2) Bank Checks is a company that prints business checks (considered
a bank expense) for Canyon Canoe Company
\(10,000
2,325
2,750
4,500
500
Checks and other debits:
Mar. 2 EFT to Bank Checks(2)
Ending balance, March 31, 2019
\) 0
31 Interest Revenue 45
3 Ck#101
6 Ck#102
15 Ck#104
16 Ck#103
55
200
4,300
1,675
750
28 EFT to Rivers Energy(3) 270
29 Ck#106 175
31 Bank service charge 70
20,120
(7,495)
$ 12,625
(3) Rivers Energy is a utility provider.
Requirements
1. Prepare the bank reconciliation at March 31, 2019.
2. Journalize any transactions required from the bank reconciliation.
3. Compute the adjusted account balance for the Cash T-account, and denote thebalance as End. Bal. Does the adjusted balance of the Cash T-account match theadjusted book balance on the bank reconciliation?
This case is based on an actual situation. Centennial Construction Company, headquartered in Dallas, Texas, built a Rodeway Motel 35 miles north of Dallas. The construction foreman, whose name was Slim Chance, hired the 40 workers needed to complete the project. Slim had the construction workers fill out the necessary tax forms, and he sent their documents to the home office. Work on the motel began on April 1 and ended September 1. Each week,Slim filled out a time card of hours worked by each employee during the week. Slim faxed the time cards to the home office, which prepared the payroll checks on Friday morning. Slim drove to the home office on Friday, picked up the payroll checks, and returned to the construction site. At 5 p.m. on Friday, Slim distributed payroll checks to the workers.
Requirements
1. Describe in detail the main internal control weakness in this situation. Specify what negative result(s) could occur because of the internal control weakness.
2. Describe what you would do to correct the internal control weakness.
What are the five components of internal control? Briefly explain each component.
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