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Chapter 7: Q24PSA (page 419)

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.

Short Answer

Expert verified

The weakness of the assignment of responsibilities can be removed by assigning the right responsibility to the right person.

Step by step solution

01

Definition of separation of duties

Separation of duties means dividing the responsibilities between two persons.

02

Missing internal control weakness

  1. In the first situation the missing internal control is the assignment of responsibilities.
  2. In the second situation, the missing internal control is the separation of duties.
  3. In the given situation, the missing internal control is internal audit.
  4. In the given situation, the missing internal control is the lack of documentation.
  5. In the given situation, the missing internal control is another control in which the company ceases the fidelity bonds of the employees.
  6. In the given situation, the missing internal control is the assignment of responsibilities.
03

Effect of weaknesses

  1. The effect of this weakness is that the company鈥檚 books are not maintained properly because the software prepares the books, and they have no knowledge about the accounting procedures.
  2. The effect of this problem is that all the duties are given to Norma Rottler, that misuses his duties due to this company having to face heavy losses
  3. In this, to get the loan company makes wrong sale figures and the wrong inventory figures, which lead to the company鈥檚 bankruptcy.
  4. In this company does not follow the documentation that leads to the fraud by employees is the receipts.
  5. In this situation, the store owner ceases the fidelity bonds that open the chances of theft by employees.
  6. In this, the weak assignment of responsibilities can cause fraud in the cash receipts.
04

Solution of weaknesses

  1. This weakness can be solved by assigning accounting procedures to the accounting department.
  2. This weakness can be solved by the separation of the duties of Norma Rottler.
  3. In this, the company needs to correct their internal audits.
  4. In this, the company has to maintain proper documentation to numbered the sales and inventory.
  5. In this, the store owner needs to remove cease on fidelity bonds.
  6. In this, the company needs to assign a person who regularly deposits the cash receipts in the bank.

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Most popular questions from this chapter

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.

Journalizing credit card sales 2018

Sep. 1 Recorded National Express credit card sales for \(96,000, net of processor fee of 1%. Ignore Cost of Goods Sold.

15 Recorded ValueMax credit card sales of \)80,000. Processor charges a 1.5% fee. ValueMax charges the fee at the end of the month, therefore Marathon uses the gross method for these credit card sales. Ignore Cost of Goods Sold.

30 ValueMax collected the fees for the month of September. Assume the

September 15 transaction is the only ValueMax credit card sale. Journalize all entries required for Marathon Running Shoes.

What are two common methods used when accepting deposits for credit card and debit card transactions?

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.

Preparing a bank reconciliation and journal entries

The August 31 bank statement of Well Healthcare has just arrived from United Bank.

To prepare the bank reconciliation, you gather the following data:

a. The August 31 bank balance is \(4,540.

b. The bank statement includes two charges for NSF checks from customers. One is

for \)380 (#1), and the other is for \(180 (#2).

c. The following Well Healthcare checks are outstanding at August 31:

Check No. Amount

237 \) 80

288 190

291 570

294 600

295 30

296 70

d. Well collects from a few customers by EFT. The August bank statement lists a

\(1,200 EFT deposit for a collection on account.

e. The bank statement includes two special deposits that Well hasn鈥檛 recorded yet:

\)800 for dividend revenue, and \(120 for the interest revenue Well earned on its

bank balance during August.

f. The bank statement lists a \)50 subtraction for the bank service charge.

g. On August 31, the Well treasurer deposited \(260, but this deposit does not appear

on the bank statement.

h. The bank statement includes a \)1,050 deduction for a check drawn by Multi-State

Freight Company. Well notified the bank of this bank error.

i. Well鈥檚 Cash account shows a balance of $2,800 on August 31.

Requirements

1. Prepare the bank reconciliation for Well Healthcare at August 31, 2018.

2. Journalize any required entries from the bank reconciliation. Include anexplanation for each entry.
See all solutions

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