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Chapter 7: Q23PSA (page 419)

Identifying internal control weakness in cash receipts

Seawind Productions makes all sales on credit. Cash receipts arrive by mail. Justin

Broadway, the mailroom clerk, opens envelopes and separates the checks from

the accompanying remittance advices. Broadway forwards the checks to another

employee, who makes the daily bank deposit but has no access to the accounting

records. Broadway sends the remittance advices, which show cash received, to

the accounting department for entry in the accounts. Broadway鈥檚 only other duty

is to grant sales allowances to customers. (A sales allowancedecreases the customer鈥檚

account receivable.) When Broadway receives a customer check for \(600 less a

\)30 allowance, he records the sales allowance and forwards the document to the

accounting department.

Requirements

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?

Short Answer

Expert verified

In the given situation weakness of internal control is the separation of duties.

Step by step solution

01

Definition of separation of duties

The separation of duties means dividing the responsibilities between two or more employees.

02

Internal control weakness

In the given situation, the weakness is of separation of the duties because the duties of the employees' responsibilities are not clearly defined. Broadway must grant sales allowance, but he performs other duties also.

03

Record of sales allowance

Broadway has to record sales allowance because this is the duty of Broadway to record sales allowance.

04

Cash receipt ledger

In the ledger of cash receipts, the cash shown is $570 because the $30 sales allowance is deducted from the sales allowance.

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Most popular questions from this chapter

Preparing a bank reconciliation and journal entries

The May cash records of Donald Insurance follow:

Cash Receipts Cash Payments

Date Cash Debit Check No. Cash Credit

May 4 \( 4,230 1416 \) 890

9 520 1417 120

14 530 1418 630

17 1,950 1419 1,090

31 1,840 1420 1,420

1421 900

1422 670

Donald鈥檚 Cash account shows a balance of \(17,750 at May 31. On May 31, Donald

Insurance received the following bank statement:

Deposits and other Credits:

May 10

May 1

May 5

May 15

May 18

May 22

Checks and other Debits:

8

11 (check no. 1416)

19

22 (check no. 1417)

29 (check no. 1418)

31 (check no. 1419)

May

May

May

May

May

May

May 31

Ending Balance

Beginning Balance

EFT \) 450

NSF

EFT

BC

\( 18,730

1,700

890

1,100

120

520

4,230

530

1,950

\) 14,400

9,380

375

630

1,900

35 (5,050)

Bank Statement for May

SC

Explanations: BC鈥揵ank collection; EFT鈥揺lectronic funds transfer;

NSF鈥搉onsufficient funds checks; SC鈥搒ervice charge

Additional data for the bank reconciliation follow:

a. The EFT credit was a receipt of rent. The EFT debit was an insurance

payment.

b. The NSF check was received from a customer.

c. The \(1,700 bank collection was for a note receivable.

d. The correct amount of check 1419, for rent expense, is \)1,900. Donald鈥檚 controller

mistakenly recorded the check for $1,090.

Requirements

1. Prepare the bank reconciliation of Donald Insurance at May 31, 2018.

2. Journalize any required entries from the bank reconciliation

Preparing a bank reconciliation

Hardy Photography鈥檚 checkbook lists the following:

Date Check No. Item Check Deposit Balance

Nov. 1 \( 500

4 622 Quick Mailing \) 45 455

9 Service Revenue \( 135 590

13 623 Photo Supplies 85 505

14 624 Utilities 45 460

18 625 Cash 50 410

26 626 Office Supplies 110 300

28 627 Upstate Realty Co. 290 10

30 Service Revenue 1,235 1,245

Hardy鈥檚 November bank statement shows the following:

Learning Objective 6

1. Adjusted Balance \)1,137

Balance

Deposits

Checks: No. Amount

622 \( 45

623 85

624 105*

625 50

Other charges:

Printed checks

Service charge

Balance

*This is the correct amount for check number 624.

\) 500

135

(285)

(48)

$ 302

23

25

Requirements

1. Prepare Hardy Photography鈥檚 bank reconciliation at November 30, 2018.

2. How much cash does Hardy actually have on November 30, 2018?

3. Journalize any transactions required from the bank reconciliation.

Preparing a bank reconciliation and journal entries

This problem continues the Crystal Clear Cleaning problem begun in Chapter 2 and

continued through Chapter 6.

In March 2019, Crystal Clear Cleaning opened a new checking account at First

Regional Bank. The bank statement dated March 31, 2019, for Crystal Clear

Cleaning follows:

Beginning Balance, March 1, 2019

Deposits and other credits:

Mar. 2

10

18

20

23 EFT Peg鈥檚 Restaurant(1)

(1) Peg鈥檚 Restaurant is a customer making a payment on account.

(3) Texas Energy is a utility provider.

(2) Check Art is a company that prints business checks (considered a

bank expense) for Crystal Clear Cleaning.

\(33,000

900

19,000

50,000

350

Checks and other debits:

Mar. 2 EFT to Check Art(2)

Ending balance, March 31, 2019

\) 0

31 Interest Revenue 50

5 Ck#235

9 Ck#237

9 Ck#236

26 Ck#239

10

2,400

1,500

2,900

2,000

28 EFT to Texas Energy(3) 130

29 Ck#240 300

31 Bank service charge 25

103,300

(9,265)

$ 94,035

Crystal Clear Cleaning鈥檚 Cash account in the general ledger shows the following

transactions for March:

Cash鈥擣irst Regional Bank Checking Account

Balance

Deposit

Deposit

Deposit

Deposit

2,400

2,900

1,500

400

2,000

94,870

Mar. 2

10

18

20

31 Deposit

33,000

900

19,000

50,000

1,770

Mar. 2

4

5

10

21

Ck#235

Ck#236

Ck#237

Ck#238

Ck#239

300

300

23

29

Ck#240

Ck#241

Balance

Requirements

1. Prepare the bank reconciliation at March 31, 2019.

2. Journalize any required entries from the bank reconciliation. Post to the CashT-account to verify the balance of the account matches the adjusted book balancefrom the bank reconciliation.

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?

Match the accounting terminology to the definitions.

1. Sarbanes-Oxley Act

2. Internal control

3. Encryption

4. Separation of duties

5. Internal auditors

a. Organizational plan and all the related measures adopted by an entity to safeguard assets,

encourage employees to follow company policies, promote operational efficiency, and ensure

accurate and reliable accounting records.

b. Employees of the business who ensure that the company鈥檚 employees are following company

policies and meeting legal requirements and that operations are running efficiently.

c. Rearranging plain-text messages by a mathematical process鈥攖he primary method of

achieving security in e-commerce.

d. Requires companies to review internal control and take responsibility for the accuracy and

completeness of their financial reports.

e. Dividing responsibilities between two or more people.
See all solutions

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