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Chapter 7: Q6RQ (page 411)
List internal control procedures related to e-commerce.
Internal control procedures related to e-commerce include encryption and firewalls.
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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.
Question: How does the Sarbanes-Oxley Act relate to internal controls?
Fill in the missing information.
a. The vendor ships the inventory and sends a(n) __________ back to the purchaser.
b. After approving all documents, the purchaser sends a(n) __________ to the vendor.
c. When ordering merchandise inventory, the purchaser sends a(n) __________ to the vendor.
d. The purchaser receives the inventory and prepares a(n) __________.
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
Correcting internal control weaknesses
Each of the following situations has an internal control weakness.
a. Jade Applications has decided that one way to cut costs in the upcoming year is to
fire the external auditor. The business believes that the internal auditor should be
able to efficiently monitor the company鈥檚 internal controls.
b. In an effort to minimize the amount of paperwork, Ross Homes has decided that it
will not keep copies of customer invoices related to sales revenue. Ross believes that
this effort will minimize the amount of data storage the company will have to pay for.
c. Elle Bee, a trusted employee for many years, has never taken a vacation. The owner
believes that he鈥檚 lucky that she is so committed to her job.
d. The Medicine Chest Company keeps a small petty cash fund to handle small cash
transactions. Because no one wants to volunteer to be the custodian, the business
manager has decided that all employees should have access to the petty cash. She
figures that as long as each employee fills out a petty cash ticket, then there are
proper controls in place.
e. Due to the cost of maintaining the security cameras, Wings and More has decided
that it will remove the cameras that monitor the cash register.
f. Bryan Miller, manager of Hardware Emporium, prides himself on hiring
exceptionally skilled employees who need no training to do their jobs.
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.
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