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Chapter 8: Problem 9

The procedures used for over-the-counter receipts are as follows. At the close of each day's business, the sales clerks count the cash in their respective cash drawers, after which they determine the amount recorded by the cash register and prepare the memorandum cash form, noting any discrepancies. An employee from the cashier's office counts the cash, compares the total with the memorandum, and takes the cash to the cashier's office. a. In_icate the weak link in internal control. b. How can the weakness be corrected?

Short Answer

Expert verified
The weak link is clerks noting discrepancies. Correct by segregating duties.

Step by step solution

01

Analyze Current Procedures

Review the current procedure for handling over-the-counter receipts. The process involves sales clerks counting cash, noting discrepancies, and another employee counting the cash again before taking it to the cashier's office. Note that the same clerk who handles cash also prepares the cash memorandum.
02

Identify Weak Internal Control

The weak link in internal control is that the sales clerks, who are responsible for handling and counting cash, are also responsible for recording discrepancies. This can lead to potential errors or fraudulent activities without independent verification.
03

Propose a Correction to Strengthen Internal Control

To correct the weakness, implement a segregation of duties. Have a separate individual or department responsible for preparing the cash memorandum. This creates a system of checks and balances to ensure accuracy and accountability, reducing the risk of fraud.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Segregation of Duties
Segregation of duties is a vital internal control concept used to minimize risks. Keeping tasks separate among individuals helps prevent fraud and errors. In the context of cash handling, it means dividing responsibilities so no one person has control over all aspects of a financial transaction.

For example, in a sales environment, clerks who manage cash should not also be responsible for preparing cash memorandums or reconciling cash drawers. By segregating these duties, businesses ensure that one person's work is verified by another, significantly reducing potential inaccuracies or fraudulent activities.

Employing different eyes and hands for different parts of cash-handling processes ensures that any errors or discrepancies are more likely to be caught, maintaining financial integrity and security.
Cash Handling Procedures
Proper cash handling procedures are fundamental to maintaining financial control. These procedures involve everything from collecting cash and counting it to reporting and reconciling the day's takings.

In any retail or service environment, cash should be handled securely. This means creating strict protocols for staff to follow at all points of cash interaction. Employees counting the cash should do so in a secure environment, free from distractions. Discrepancies, if any, should be noted immediately, and cash should be transferred to the cashier's office as soon as possible.

By establishing a routine and consistent cash handling protocol, businesses can reduce the opportunity for errors and enforce a system that holds individuals accountable for discrepancies.
Fraud Prevention
Fraud prevention is a critical goal of internal controls. It involves implementing systems and practices that protect a business鈥檚 assets from theft or misuse. A powerful fraud prevention strategy includes the separation of duties and implementing strong cash handling procedures.

By ensuring that no single employee is responsible for both tracking and managing cash, businesses create a layer of security. This makes it much harder for dishonest employees to commit fraud without being detected.

Regular audits and surprise cash counts can also serve as effective tools for preventing fraud. Encouraging an open environment for reporting suspicious activities without fear of retribution further strengthens fraud prevention efforts.
Accounting Controls
Accounting controls encompass all the policies and procedures that businesses put in place to ensure the accuracy and integrity of their financial data. They are designed to prevent errors and fraud in financial reporting.

Key components of effective accounting controls include maintaining accurate records, regular reconciliations, and routine audits. These controls provide businesses with assurances that financial statements are free from material misstatement, whether caused by fraud or error.

Effective accounting controls are also crucial for compliance with laws and regulations, making them a foundational element of robust internal controls. They provide a clear trail for all transactions and ensure that the business鈥檚 finances are accurate and reliable.

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Most popular questions from this chapter

Clear Voice Company, a communications equipment manufacturer, recently fell victim to a fraud scheme developed by one of its employees. To understand the scheme, it is necessary to review Clear Voice鈥檚 procedures for the purchase of services. The purchasing agent is responsible for ordering services (such as repairs to a photocopy machine or office cleaning) after receiving a service requisition from an authorized manager. However, since no tangible goods are delivered, a receiving report is not prepared. When the Accounting Department receives an invoice billing Clear Voice for a service call, the accounts payable clerk calls the manager who requested the service in order to verify that it was performed. The fraud scheme involves Dana Foley, the manager of plant and facilities. Dana arranged for her uncle鈥檚 company, Foley Industrial Supply and Service, to be placed on Clear Voice鈥檚 approved vendor list. Dana did not disclose the family relationship. On several occasions, Dana would submit a requisition for services to be provided by Foley Industrial Supply and Service. However, the service requested was really not needed, and it was never performed. Foley would bill Clear Voice for the service and then split the cash payment with Dana. Explain what changes should be made to Clear Voice鈥檚 procedures for ordering and paying for services in order to prevent such occurrences in the future.

Tyler Kirsch has recently been hired as the manager of Dark Canyon Coffee. Dark Canyon Coffee is a national chain of franchised coffee shops. During his first month as store manager, Tyler encountered the following internal control situations: a. Dark Canyon Coffee has one cash register. Prior to Tyler's joining the coffee shop, each employee working on a shift would take a customer order, accept payment, and then prepare the order. Tyler made one employee on each shift responsible for taking orders and accepting the customer's payment. Other employees prepare the orders. b. Since only one employee uses the cash register, that employee is responsible for counting the cash at the end of the shift and verifying that the cash in the drawer matches the amount of cash sales recorded by the cash register. Tyler expects each cashier to balance the drawer to the penny every time-no exceptions. c. Tyler caught an employee putting a box of 100 single-serving tea bags in his car. Not wanting to create a scene, Tyler smiled and said, "I don't think you're putting those tea bags on the right shelf. Don't they belong inside the coffee shop?" The employee returned the tea bags to the stockroom. State whether you agree or disagree with Tyler's method of handling each situation and explain your answer.

The actual cash received from cash sales was \(8,374.58, and the amount indicated by the cash register total was \)8,351.14. Journalize the entry to record the cash receipts and cash sales.

The actual cash received from cash sales was \(\$ 21,099.75\), and the amount indicated by the cash register total was \(\$ 21,114.26\). Journalize the entry to record the cash receipts and cash sales.

An employee of JHT Holdings, Inc., a trucking company, was responsible for resolving roadway accident claims under \(\$ 25,000\). The employee created fake accident claims and wrote settlement checks of between \(\$ 5,000\) and \(\$ 25,000\) to friends or acquaintances acting as phony "victims." One friend recruited subordinates at his place of work to cash some of the checks. Beyond this, the JHT employee also recruited lawyers, who he paid to represent both the trucking company and the fake victims in the bogus accident settlements. When the lawyers cashed the checks, they allegedly split the money with the corrupt JHT employee. This fraud went undetected for two years. Why would it take so long to discover such a fraud?
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