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Accounts Receivable Internal Controls and Effect of an Error

8. An employee of Wu Company collects $100 from a customer for payment of a balance due account. The employee keeps the money for personal use, debits sales returns and allowances, and credits accounts receivable in the general journal. Which internal control procedure would have discouraged this embezzlement?
a. Comparing the accounts receivable subsidiary ledger with accounts receivable in the general ledger

b. providing the separation of duties of employees
c. obtaining fidelity bond insurance for employees handling cash
d. using prenumbered sales invoices and records

9. Two years ago a company's sales revenue was overstated by $15000. The error is discovered this year. The company's tax rate is 40%. How should this error be disclosed on the current financial statements?
a. decrease current net income by $9,000
b. decrease current net income by $15000
c. decrease beginning retained earnings by 9,000
d. decrease ending retained earnings by 9,000

Solution Preview

8. The internal control weakness described here is that the same employee who collects the cash can manipulate the accounting records. Had the employee not been able to do both, either the employee would have stolen the funds, leading the customer to complain, or he employee would have submitted the collection record to the person responsible for recording accounts receivable actions and the ...

Solution Summary

8. An employee of Wu Company collects $100 from a customer for payment of a balance due account. The employee keeps the money for personal use, debits sales returns and allowances, and credits accounts receivable in the general journal. Which internal control procedure would have discouraged this embezzlement?

a. Comparing the accounts receivable subsidiary ledger with accounts receivable in the general ledger
b. providing the separation of duties of employees
c. obtaining fidelity bond insurance for employees handling cash
d. using prenumbered sales invoices and records

9. Two years ago a company's sales revenue was overstated by $15000. The error is discovered this year. The company's tax rate is 40%. How should this error be disclosed on the current financial statements?
a. decrease current net income by $9,000
b. decrease current net income by $15000
c. decrease beginning retained earnings by 9,000
d. decrease ending retained earnings by 9,000

$2.19