The following situations describe two equipment purchases and two cash receipts. In each pair, one situation's internal controls are much better than the others. Evaluate the internal controls in each situation as strong or weak, and give the reason for your answers.
a. Centennial Homes policy calls for construction supervisors to request the equipment needed for construction jobs. The home office then purchases the equipment and has it shipped to the construction site.
Strong. There is a separation of duties. The supervisor requests the equipment and someone else in the company orders/purchase the equipment. The home office has the equipment sent to the construction site.
b. Wayside Construction Company policy calls for project supervisors to purchase the equipment needed for construction jobs. The supervisors then submit the paid receipts to the home office for reimbursement. This policy enables supervisors to get the equipment they need quickly and keep construction jobs moving along.
Weak. There is no separation of duties. The supervisor purchases the equipment and sends over a receipt for reimbursement. Even though they might get the equipment earlier, they could still order the equipment and then cancel the order but still submit for reimbursement. Also, the construction supervisor could be in collusion with the equipment company and make fake receipts.
a. Cash received by mail goes straight to the accountant, who debits Cash and credits Accounts Receivable to record collections from customers. The accountant then deposits the cash in the bank.
Weak. There is no separation of duties. There is only one person who gets cash, does the books, and deposits the money into the account. This person could easily steal in this position. There is no other person overseeing these activities.
b. Cash received by mail goes to the mail room, where a mail clerk opens the envelopes and totals the cash receipts for the day. The mail clerk forwards customer checks to the treasurer for deposit in the bank and forwards the remittance slips to the accounting department for posting credits to customer accounts.
Strong. There is separation of duties. There are different people doing different activities to process cash received. One person opens the mail, gets the checks, and totals up the cash receipts. They then forward to another person for deposits and submits the remittance slips to the accounting department.
The following situations suggest a strength or a weakness in internal control. Identify each as a strength or weakness, and give the reason for your answer.
a. Top managers delegate all internal control measures to the accounting department.
Weakness – internal control responsibilities should be spread throughout the various departments of the company. Different groups should audit group other than their own.
b. The accounting department orders merchandise and approves invoices for payment.
Weakness – there is no separation of duties with the ordering merchandise and approving invoices. These activities should be share between two or more people.
c. The operator of a computer has no other accounting or cash-handling duties.
Strength - the computer operator only inputs the information into the accounts, ALL other accounting duties are delegated to others in the department.
d. Cash received over the counter is controlled by the sales clerk, who rings up the sale and places the cash in the register. The sales clerk matches the total recorded on the control tape stored in the register to each day's cash sales.
Weakness – The matching of the control tape with the register each day should be done by another person. They could lead to stealing if the cashier was in charge of collecting the cash and verifying the control tape. They could pocket the money and not record the sale on the register.
e. The officer who signs checks need not examine the payment packet because he is confident the amounts are correct.
Weakness – The officer always needs to examine payment packet. This is done as a final check to see if everything is right and accounted for.
When you check out a Best Buy store, the cash register displays the amount of the sale, the cash received from the customer, and any changed returned to the customer. Suppose the register also produces a customer receipt but keeps no internal record of transactions. At the end of the day, the clerk counts the cash in the register and gives it to the cashier for deposit in the company bank account.
Write a memo to the store manager. Identify the internal control weakness over cash receipts, and explain how the weakness gives an employee the opportunity to steal cash. State how to prevent such a theft.
To: Best Buy Store Manager
From: Best Buy Internal Control Department - Independent Auditor
Date: July 18, 2006
Subject: Internal Control Weakness over Cash Receipts
Please be advised that the activities involving the control over the cash receipts process at the cash registers are flawed and can be compromised. The current process calls for the cashier to count the cash in the register and reconcile that amount with the cash receipts produced by the register. Since there are no internal records kept on all transactions at the cash register, the receipts produced by the register can be easily thrown away. The fact that the employee counts their own drawer and reports their totals for deposits could be a potential situation for theft.
To illustrate: If there is a missing receipt for the amount of $10, then the cash in the register would be over in the amount of $10. This $10 could easily be stolen from the register by the employee counting the cash drawer. This would cause the receipts and cash in the register to be in balance. The employee will make the deposit slip for the amount less the $10.
To prevent potential theft, a manager has to count the drawer and the employee has to count the receipts. If the amounts do not match, then the drawer and the receipts will be recounted for assurance. The receipts must be wrapped with the brown receipts paper provided and have to be signed by both the employee and the manager. The receipts and cash are to be placed into a zippered pouch and sent to the cash receipts group in the accounting department. If there are any questions about this new process, please feel free to contact me at: (702) 555-5511.
Leather Goods Company created a $300 imprest petty cash fund. During the month, the fund custodian authorized and signed petty cash tickets as follows:
Ticket No. Item Account Debited Amount
1 Delivery of goods to customers Delivery Expense $22
2 Mail package Postage Expense 52
3 Newsletter Supplies Expense 34
4 Key to closet Miscellaneous Expense 3
5 Wastebasket Miscellaneous Expense 13
6 Computer diskettes Supplies Expense 85
1. Make the general journal entries to (a) create the petty cash fund and (b) record its replenishment. Include explanations.
2. Describe the items in the fund both before and after replenishment.
Before replenishment, no items are in the petty cash fund except for the amount of cash to start the fund. As the petty cash is used up, the receipts for the expenses are placed in the petty cash-box. When the petty cash is to be replenished, the receipts are accounted for and debited to their respected expense accounts. The Petty cash fund is replenished with the amount used up – cash in bank is credited for that amount.