Chapter 6: Q6DQ (page 304)
What are the limitations of internal controls?
Answer
The limitations of internal control emerge from two sources: the human element (human mistake or human fraud) and the cost-benefit principle.
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For each of the following items a through g, indicate whether its amount (1) affects the bank or book side of a bank reconciliation, (2) represents an addition or a subtraction in a bank reconciliation, and (3) requires an adjusting journal entry.
Bank or Book Side Add or Subtract Adj. Entry or Not
b. Bank service charges . . . . . . . . . . . . . . . . . .
An internal control system consists of all policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies. Evaluate each of the following statements and indicate which are true and which are false regarding the objectives of an internal control system.
2. The primary objective of internal control procedures is to safeguard the business against theft from government agencies.
For each of these five separate cases, identify the principle(s) of internal control that is violated. Recommend what the business should do to ensure adherence to principles of internal control.
1. Latisha Tally is the company’s computer specialist and oversees its computerized payroll system. Her boss recently asked her to put password protection on all office computers. Latisha has put a password in place that allows only the boss access to the file where pay rates are changed and personnel are added or deleted from the payroll.
Blues Music Center had the following petty cash transactions in March of the current year. March 5 Wrote a \(250 check, cashed it, and gave the proceeds and the petty cashbox to Jen Rouse, the petty cashier.
6 Paid \)12.50 COD shipping charges on merchandise purchased for resale, terms FOB shipping point. Blues uses the perpetual system to account for merchandise inventory.
11 Paid \(10.75 in delivery expense on merchandise sold to a customer, terms FOB destination.
12 Purchased office file folders for \)14.13 that are immediately used.
14 Reimbursed Bob Geldof, the manager, \(11.65 for office supplies purchased and used.
18 Purchased office printer paper for \)20.54 that is immediately used.
27 Paid \(45.10 COD shipping charges on merchandise purchased for resale, terms FOB shipping point.
28 Paid postage expense of \)18.
30 Reimbursed Geldof \(56.80 for mileage expense.
31 Cash of \)61.53 remained in the fund. Sorted the petty cash receipts by accounts affected and
exchanged them for a check to reimburse the fund for expenditures.
31 The petty cash fund amount is increased by \(50 to a total of \)300.
Required
1. Prepare the journal entry to establish the petty cash fund.
The following information is available to reconcile Severino Co.’s book balance of cash with its bank statement cash balance as of December 31, 2017.
a. The December 31 cash balance according to the accounting records is \(32,878.30, and the bank statement cash balance for that date is \)46,822.40.
b. Check No. 1273 for \(4,589.30 and Check No. 1282 for \)400, both written and entered in the accounting records in December, are not among the canceled checks. Two checks, No. 1231 for \(2,289 and
No. 1242 for \)410.40, were outstanding on the most recent November 30 reconciliation. Check No. 1231 is listed with the December canceled checks, but Check No. 1242 is not.
c. When the December checks are compared with entries in the accounting records, it is found that Check No. 1267 had been correctly drawn for \(3,456 to pay for office supplies but was erroneously entered in the accounting records as \)3,465.
d. Two memoranda are enclosed with the statement and are unrecorded at the time of the reconciliation. The first is for a \(762.50 charge that dealt with an NSF check for \)745 received from a customer, Titus Industries, in payment of its account. The bank assessed a \(17.50 fee for processing it. The second is \)99 in miscellaneous expenses for check printing.
e. The bank statement shows that the bank collected \(19,000 cash on a note receivable for the company, deducted a \)20 collection expense, and credited the balance to the company’s Cash account. Severino did not record this transaction before receiving the statement.
f. Severino’s December 31 daily cash receipts of $9,583.10 were placed in the bank’s night depository on that date but do not appear on the December 31 bank statement.
Required
2. Prepare the journal entries (in dollars and cents) necessary to bring the company’s book balance of cash into conformity with the reconciled cash balance as of December 31, 2017.
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