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Chapter 7: Q3SE (page 412)
Applying internal control over cash receipts by mail. Review the internal controls over cash receipts by mail presented in the chapter. Exactly what is accomplished by the final step in the process, performed by the controller?
The debit of the cash is equal to the amount deposited in the bank.
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Understanding internal control, components, procedures, and laws
Match the following terms with their definitions.
1. Internal control
2. Control procedures
3. Firewalls
4. Encryption
5. Environment
6. Information system
7. Separation of duties
8. Collusion
9. Documents
10. Audits
11. Operational efficiency
12. Risk assessment
13. Sarbanes-Oxley Act
a. Two or more people working together to overcome internal controls.
b. Part of internal control that ensures resources are not wasted.
c. Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports.
d. Should be prenumbered to prevent theft and inefficiency.
e. Limits access to a local network.
f. Example: The person who opens the bank statement should not also be the person who is reconciling cash.
g. Identification of uncertainties that may arise due to a company鈥檚 products, services, or operations.
h. Examination of a company鈥檚 financial statements and accounting system by a trained accounting professional.
i. Without a sufficient one of these, information cannot properly be gathered and summarized.
j. The organizational plan and all the related measures that safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting data.
k. Component of internal control that helps ensure business goals are achieved.
l. Rearranges data by a mathematical process.
m. To establish an effective one, a company鈥檚 CEO and top managers must behave honorably to set a good example for employees.
Identifying internal control weakness in cash receipts
Pendley Productions makes all sales on credit. Cash receipts arrive by mail. Larry
Chipello, the mailroom clerk, opens envelopes and separates the checks from the
accompanying remittance advices. Chipello forwards the checks to another employee,
who makes the daily bank deposit but has no access to the accounting records.
Chipello sends the remittance advices, which show cash received, to the accounting
department for entry in the accounts. Chipello鈥檚 only other duty is to grant sales
allowances to customers. (A sales allowancedecreases the customer鈥檚 account receivable.)
When Chipello receives a customer check for \(575 less a \)45 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?
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
What are some common controls used with a bank account?
What are some common controls used with a bank account?
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