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Internal Controls and Petty Cash Fund

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Resource: Fundamental Accounting Principles, pp338 and 339
Problems with Problems 8-1A and 8-3A attached

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Solution Summary

The solution explains two questions - 1. Problem 8-1A relating to analyzing internal controls 2. Problem 8-3A relating to setting up, reimbursing and increasing the petty cash fund.

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8-1 A

1. Violates separation of duties since the same person records the receipts and posts them in the customer accounts. This gives the possibility of fraud. The business should have different persons for the two jobs. One person to record the receipts and another person with the responsibility of posting.

2. Violates the principle of establishing responsibility. Since the same petty cash fund is being used by two persons, there is no individual responsibility in case there is a cash shortfall. The company should have two petty cash funds for each Jeff and Jones or the company should make Jeff the sole custodian, which he is now, and stop cash disbursement during lunch ...

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