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Internal Control and Bank Reconciliations

Problem 8-1A

For each of these five separate cases, identify the principle of internal control that is violated. Recommend what the business should do to ensure adherence to principles of internal control.
1. Heather Flatt records all incoming customer cash receipts for her employer and posts the customer payments to their respective accounts.
2. At Netco Company, Jeff and Jose alternate lunch hours. Jeff is the petty cash custodian, but if someone needs petty cash when he is at lunch, Jose fills in as custodian.
3. Nadine Cox posts all patient charges and payments at the P-Town Medical Clinic. Each night Nadine backs up the computerized accounting system to a tape and stores the tape in a locked file at her desk.
4. Barto Sayles prides himself on hiring quality workers who require little supervision. As office manager, Barto gives his employees full discretion over their tasks and for years has seen no reason to perform independent reviews of their work.
5. Desi West's manager has told her to reduce costs. Desi decides to raise the deductible on the plant's property insurance from $5,000 to $10,000. This cuts the property insurance premium in half. In a related move, she decides that bonding the plant's employees is a waste of money since the company has not experienced any losses due to employee theft. Desi saves the entire amount of the bonding insurance premium by dropping the bonding insurance.

Problem 8-3A

Inoke Gallery had the following petty cash transactions in February of the current year:
Feb. 2 Wrote a $300 check, cashed it, and gave the proceeds and the petty cashbox to Bo Brown, the petty cashier.
5 Purchased bond paper for the copier for $10.13 that is immediately used.
9 Paid $22.50 COD shipping charges on merchandise purchased for resale, terms FOB shipping point. Metro uses the perpetual system to account for merchandise inventory.
12 Paid $9.95 postage to express mail a contract to a client.
14 Reimbursed Alli Buck, the manager, $58 for business mileage on her car.
20 Purchased stationery for $77.76 that is immediately used.
23 Paid a courier $18 to deliver merchandise sold to a customer, terms FOB destination.
25 Paid $15.10 COD shipping charges on merchandise purchased for resale, terms FOB shipping point.
27 Paid $64 for postage expenses.
28 The fund had $21.23 remaining in the petty cash box. Sorted the petty cash receipts by accounts affected and exchanged them for a check to reimburse the fund for expenditures.
The fund amount is also increased to $400.
Required
1. Prepare the journal entry to establish the petty cash fund.
2. Prepare a petty cash payments report for February with these categories: delivery expense, mileage expense, postage expense, merchandise inventory (for transportation-in), and office supplies expense. Sort the payments into the appropriate categories and total the expenditures in each category.
3. Prepare the journal entries for part 2 to both (a) reimburse and (b) increase the fund amount.

Problem 8-4A

The following information is available to reconcile Clark Company's book balance of cash with its bank statement cash balance as of July 31, 2005:
a. After all posting is complete on July 31, the company's Cash account has a $26,193 debit balance, but its July bank statement shows a $28,020 cash balance.
b. Check No. 3031 for $1,380 and Check No. 3040 for $552 were outstanding on the June 30 bank reconciliation. Check No. 3040 is listed with the July canceled checks, but Check No. 3031 is not. Also, Check No. 3065 for $336 and Check No. 3069 for $2,148, both written in July, are not among the canceled checks on the July 31 statement.
c. In comparing the canceled checks on the bank statement with the entries in the accounting records, it is found that Check No. 3056 for July rent was correctly written and drawn for $1,250 but was erroneously entered in the accounting records as $1,230.
d. A credit memorandum enclosed with the July bank statement indicates the bank collected $9,000 cash on a noninterest-bearing note for Clark, deducted a $45 collection fee, and credited the remainder to its account. Clark had not recorded this event before receiving the statement.
e. A debit memorandum for $805 lists a $795 NSF check plus a $10 NSF charge. The check had been received from a customer, Jim Shaw. Clark has not yet recorded this check as NSF.
f. Enclosed with the July statement is a $15 debit memorandum for bank services. It has not yet been recorded because no previous notification had been received.
g. Clark's July 31 daily cash receipts of $10,152 were placed in the bank's night depository on that date, but do not appear on the July 31 bank statement.
Required
1. Prepare the bank reconciliation for this company as of July 31, 2005.
2. Prepare the journal entries necessary to bring the company's book balance of cash into conformity with the reconciled cash balance as of July 31, 2005.
Analysis Component
3. Assume that the July 31, 2005, bank reconciliation for this company is prepared and some items are treated incorrectly. For each of the following errors, explain the effect of the error on (i) the adjusted bank statement cash balance and (ii) the adjusted cash account book balance.
a. The company's unadjusted cash account balance of $26,193 is listed on the reconciliation as $26,139.
b. The bank's collection of the $9,000 note less the $45 collection fee is added to the bank statement cash balance on the reconciliation.

Solution Preview

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Problem 8-1A

For each of these five separate cases, identify the principle of internal control that is violated. Recommend what the business should do to ensure adherence to principles of internal control.
1. Heather Flatt records all incoming customer cash receipts for her employer and posts the customer payments to their respective accounts.

Violates separation of duties. The company should implement a policy whereby the person recording incoming cash receipts is not responsible for posting the payments to the customer accounts.

2. At Netco Company, Jeff and Jose alternate lunch hours. Jeff is the petty cash custodian, but if someone needs petty cash when he is at lunch, Jose fills in as custodian.

Violates the principle of establishing responsibility. Only Jeff should have access to the petty cash fund since he is the custodian. The company should implement a policy of not allowing petty cash transactions over the lunch hour. Alternatively, Jose could also serve as a petty cash custodian with his own petty cash fund.

3. Nadine Cox posts all patient charges and payments at the P-Town Medical Clinic. Each night Nadine backs up the computerized accounting system to a tape and stores the tape in a locked file at her desk.

Violates the proper application of technological controls. While the daily backup is a very good internal control, the tape needs to be taken off the premises every night. If the building and computer are destroyed, the data then can be restored from the tape since it is safely kept off the premises. The company should implement a policy of storing tapes off the premises nightly.

4. Barto Sayles prides himself on hiring quality workers who require little supervision. As office manager, Barto gives his employees full discretion over their tasks and for years has seen no reason to perform independent reviews of their work.

Violates regular and independent review. Barto Sayles needs to implement a way to regularly and independently review his employees. Hiring of internal auditors or an outside consultant to objectively review the internal controls and the employees' work needs to be implemented.

5. Desi West's manager has told her to reduce costs. Desi decides to raise the deductible on the plant's property insurance from $5,000 to $10,000. This cuts the property insurance premium in half. In a related move, she decides that bonding the plant's employees is a waste of money since the company has not experienced any losses due to employee ...

Solution Summary

The solution explains the provisions for internal control, journal entry for petty cash and bank reconciliation for Clark Company

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