Quick Study 8-6

1 a. Outstanding Checks – Affect bank reconciliation (subtracted)

b. Debit Memos – Affect the bank account (no effect in reconciliation)

c. NSF checks – Affect the bank account (no effect in reconciliation)

d. Unrecorded deposits – Affect bank reconciliation (added)

e. Interest on cash balance – Affect the bank account (no effect in reconciliation)

f. Credit memos – Affect the bank account (no effect in reconciliation)

g. Bank Service charges – Affect the bank account (no effect in reconciliation)

Exercise 8-3

From the information provided, the internal control system of the organization appears to be very weak.  Such negligence in establishing appropriate internal controls and abiding with the salient principles of internal controls led to a loss of $84,000.  Management should thus review the main principles broken in order to ensure that they are put in place and thus safeguard stakeholders’ wealth.

The failure to apply segregation of duties and leave all the responsibility of the salary transaction to the record keeper is the first infringement.  The employee processing the payroll should not be the same person conducting the payments.  This leads to another principle, which encompasses establishing responsibilities.  For segregation of duties to perform properly it is essential that all responsibilities are clearly defined and outlined to employees concerned.

Conducting independent reviews and checking on a consistent basis is another important principle that was not carried out.  The financial controller holds the responsibility to perform such checking on a periodic basis.  In order that this internal control functions properly it is also necessary that appropriate accounting records are kept.  Technology can aid in this respect, namely with respect to accounting packages that hold standardized programs that aid in the computational process and provide the necessary evidence for checking.  From the information provided it looks like none of these principles was followed and everything was left in the hands of the bookkeeper.

The last but not least principle is authorization and approval of checks, before being carried out.  During the authorization process the person in charge should demand and check corresponding evidence to ensure that the correct amounts and the correct employees are paid.  The absence of such premise also made it easier for the bookkeeper to conduct such fraud.

Exercise 8-4

JOURNAL
Date

Debit

$
Credit

$
9 September
Petty Cash
400

9 September
Cash

400
Being Petty Cash Fund established.
30 September
Transportation-in
32

30 September
Postage Expenses
113

30 September
Miscellaneous Expenses
87

30 September
Cash Short
2

30 September
Cash

234
Being Petty Cash Fund reimbursed.
30 September
Cash
100

30 September
Petty Cash

100
Being decrease of Petty Cash Fund Amount.

Reference:

Randall H. (1999). Accounting. Third Edition. London: Letts Educational.