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Internal Control Procedures

E1: Careful scrutiny of accounting records and financial statements can lead to the discovery of fraud or embezzlement. Each of the following situations may indicate a possible breakdown in internal control. Indicate the nature of the possible fraud or embezzlement in each situation:

1. Wages expense for a branch office was 30 percent higher in 20x2 than in 20x1, even though the office was authorized to employ only the same four employees and raises were only 5 percent in 20x2.

2. Sales returns and allowances increased from 5 percent to 20 percent of sales in the first two months of 20x2, after record sales in 20x1 resulted in large bonuses for the sales staff.

3. Gross margin decreased from 40 percent of net sales in 20x1 to 30 percent in 20x2, even though there was no change in pricing. Ending inventory was 50 percent less at the end of 20x2 than it was at the beginning of the year. There is no immediate explanation for the decrease in inventory.

4. A review of daily records of cash register receipts shows that one cashier consistently accepts more discount coupons for purchases than do the other cashiers.

E2: Jessie's Video Store maintains the following policies with regard to purchases of new videotapes at each of its branch stores: Match the following control activities to each of the above policies. (Some may have several answers.)

a. Authorization
b. Recording transactions
c. Documents and records
d. Physical controls
e. Periodic independent verification
f. Separation of duties
g. Sound personnel policies

1. Employees are required to take vacations, and the duties of employees are rotated periodically.

2. Once each month a person from the home office visits each branch store to examine the receiving records and to compare the inventory of videos with the accounting records.

3. Purchases of new videos must be authorized by purchase order in the home office and paid for by the treasurer in the home office. Receiving reports are prepared in each branch and sent to the home office.

4. All new personnel receive one hour of training in how to receive and catalogue new videos.

5. The company maintains a perpetual inventory system that keeps track of all videos purchases, sold and on hand.

E3: Developing a convenient means of providing sales representatives with cash for their incidental expenses, such as entertaining a client at lunch, is a problem many companies face. Under one company's plan, the sales representatives receive advances in cash from the petty cash fund. Each advance is supported by an authorization from the sales manager. The representative returns the receipt from the expenditure and any unused cash, which is replaced in the petty cash fund. The cashier of the petty cash fund is responsible for seeing that the receipt and the cash returned equal the advance. When the petty cash fund is reimbursed, the amount of the representative's expenditure is debited to Direct Sales Expense.

What is the weak point in this system?

What fundamental principle of internal control is being ignored?

What improvement in the procedure can you suggest?

E4: An accountant is responsible for the following procedures:

1. receiving all cash
2. maintaining the general ledger
3. maintaining the accounts receivable subsidiary ledger that includes the individual records of each customer
4. maintaining the journals for recording sales, purchases, and cash receipts
5. preparing monthly statements to be sent to customers. As a service to customers and employees, the company allows the accountant to cash checks of up to $50 with money from the cash receipts. When deposits are made, the checks are included in place of the cash receipts.

What weakness in internal control exists in this system?

E5: Ted Songe, who operates a small grocery store, has established the following policies with regard to the checkout cashiers:

1. Each cashier has his or her own cash drawer, to which no one else has access.
2. Each cashier may accept checks for purchases under $50 with proper identification. Checks over $50 must be approved by Songe before they are accepted.
3. Every sale must be rung up on the cash register and a receipt given to the customer. Each sale is recorded on a tape inside the cash register.
4. At the end of each day, Songe counts the cash in the drawer and compares it with the amount on the tape inside the cash register.

Match the following conditions for internal control to each of the policies listed above:

a. Transactions are executed in accordance with management's general or specific authorization.
b. Transactions are recorded as necessary to permit preparation of financial statements and maintain accountability for assets.
c. Access to assets is permitted only as allowed by management.
d. At reasonable intervals, the records of assets are compared with the existing assets.

E6: Prepare a bank reconciliation from the following information:

a. Balance per bank statement as of August 31, $8,454.54
b. Balance per books as of August 31, $6,138.04
c. Deposits in transit, $1,134.42
d. Outstanding checks, $3,455.92
e. Bank service charge, $5.00

E7: Compute the correct amounts to replace each letter in the following table:

Balance per bank statement A $26,700 $945 $5,970
Deposits in transit 1,800 B 150 375
Outstanding checks 4,500 3,000 C 225
Balance per books 10,350 28,200 675 D

E8: Haskell Corporation received a notice with its bank statement that the bank had collected a note for $4,000 plus $20 interest from L. Peters and credited Haskell Corporation's account for the total less a collection charge of $30.

--Explain the effect that these items have on the bank reconciliation.

Prepare an entry in journal form to record the information on the books of Haskell Corporation.

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E1: Careful scrutiny of accounting records and financial statements can lead to the discovery of fraud or embezzlement. Each of the following situations may indicate a possible breakdown in internal control. Indicate the nature of the possible fraud or embezzlement in each situation:

1. Wages expense for a branch office was 30 percent higher in 20x2 than in 20x1, even though the office was authorized to employ only the same four employees and raises were only 5 percent in 20x2.

The nature of this fraud is the intentional irregular claims and payments whereby the branch office accountant may intentionally pay higher wages then the authorized amount to the employees.

2. Sales returns and allowances increased from 5 percent to 20 percent of sales in the first two months of 20x2, after record sales in 20x1 resulted in large bonuses for the sales staff.

The nature of this fraud is the intentional irregular claims and payments by using the fake sales to boost their sales amount in order to receive large bonuses.

3. Gross margin decreased from 40 percent of net sales in 20x1 to 30 percent in 20x2, even though there was no change in pricing. Ending inventory was 50 percent less at the end of 20x2 than it was at the beginning of the year. There is no immediate explanation for the decrease in inventory.

There could be pilferage of inventory, which will affect the gross margin for the company.

4. A review of daily records of cash register receipts shows that one cashier consistently accepts more discount coupons for purchases than do the other cashiers.

This is the nature of pilferage, whereby the cashier may embezzle the money from the cash register and replace the same amount with discount coupons.

E2: Jessie's Video Store maintains the following policies with regard to purchases of new videotapes at each of its branch stores: Match the following control activities to each of the above policies. (Some may have several answers.)

a. Authorization 3
b. Recording transactions 5
c. Documents and records 3, 5
d. Physical controls 2, 5
e. Periodic independent verification 2
f. Separation of duties 3, 4
g. Sound personnel policies 1, 4

1. Employees are required to take vacations, and the duties of employees are rotated periodically.
This control activity can be both separation of duties and sound personnel policies because it shows that each employee has to be responsible for different duty and that it is the company's policy to rotate the duties of their ...

Solution Summary

This solution is comprised of a detailed explanation to answer the request of these internal control based questions, with more than 1,500 words of text. This solution is also provided in Word format.

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