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Chapter 7: Q4SE (page 412)

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?

Short Answer

Expert verified

The separation of duties avoids weaknesses.

Step by step solution

01

Definition of control overpayment by check

Control overpayment by check is the control that controls the payments made by check.

02

The purchasing agent cheats the company

The purchasing agent can cheat the company by making more amount of payments than the number of goods purchased.

03

Internal control weakness

This internal control weakness can be controlled by separating the duties.

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Most popular questions from this chapter

Preparing a bank reconciliation

Jim Root Corporation operates four bowling alleys. The business just received the

On October 31, 2018, bank statement from City National Bank, and the statement shows

an ending balance of \(910. Listed on the statement are an EFT rent collection of

\)440, a service charge of \(7, NSF checks totaling \)50, and a \(23 charge for printed

checks. In reviewing the cash records, the business identified outstanding checks totaling

\)440 and a deposit in transit of \(1,800. During October, the business recorded a

\)260 check by debiting Salaries Expense and crediting Cash for \(26. The business鈥檚

Cash account shows an October 31 balance of \)2,144.

Requirements

1. Prepare the bank reconciliation at October 31.

2. Journalize any transactions required from the bank reconciliation.

Recording transactions from a bank reconciliation Review your results from preparing Guard Dog Security Systems鈥� bank reconciliation in Short Exercise S7-9. Journalize the company鈥檚 transactions that arise from the bank reconciliation. Include an explanation with each entry.

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.

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.

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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