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This case is based on an actual situation. Centennial Construction Company, headquartered in Dallas, Texas, built a Rodeway Motel 35 miles north of Dallas. The construction foreman, whose name was Slim Chance, hired the 40 workers needed to complete the project. Slim had the construction workers fill out the necessary tax forms, and he sent their documents to the home office. Work on the motel began on April 1 and ended September 1. Each week,Slim filled out a time card of hours worked by each employee during the week. Slim faxed the time cards to the home office, which prepared the payroll checks on Friday morning. Slim drove to the home office on Friday, picked up the payroll checks, and returned to the construction site. At 5 p.m. on Friday, Slim distributed payroll checks to the workers.

Requirements

1. Describe in detail the main internal control weakness in this situation. Specify what negative result(s) could occur because of the internal control weakness.

2. Describe what you would do to correct the internal control weakness.

Short Answer

Expert verified

Separation of duties is a type of internal control in which the company separates the responsibilities between two or more employees.

Step by step solution

01

Definition of the internal control

Internal control is a process by which the company can manage its internal activities.

02

Internal weakness

The main internal control weakness of the company is the separation of duties because Slim is the only person who manages everything from construction to the payroll check of the company. This will create many problems for the company. The main problem generated from this weakness is that there are chances of mistakes in the company’s payrolls.

03

Ways to correct weakness

To correct this weakness, the company has to assign the duty of a person that has charge of payroll checks. By this, the company can resolve the problem.

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Most popular questions from this chapter

Understanding internal control, components, procedures, and laws

Match the following terms with their definitions.

1. Internal control

2. Control procedures

3. Firewalls

4. Encryption

5. Environment

6. Information system

7. Separation of duties

8. Collusion

9. Documents

10. Audits

11. Operational efficiency

12. Risk assessment

13. Sarbanes-Oxley Act

a. Two or more people working together to overcome internal controls.

b. Part of internal control that ensures resources are not wasted.

c. Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports.

d. Should be prenumbered to prevent theft and inefficiency.

e. Limits access to a local network.

f. Example: The person who opens the bank statement should not also be the person who is reconciling cash.

g. Identification of uncertainties that may arise due to a company’s products, services, or operations.

h. Examination of a company’s financial statements and accounting system by a trained accounting professional.

i. Without a sufficient one of these, information cannot properly be gathered and summarized.

j. The organizational plan and all the related measures that safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting data.

k. Component of internal control that helps ensure business goals are achieved.

l. Rearranges data by a mathematical process.

m. To establish an effective one, a company’s CEO and top managers must behave honorably to set a good example for employees.

Accounting for petty cash transactions

On June 1, Fab Salad Dressings creates a petty cash fund with an imprest balance of

\(300. During June, Al Franklin, the fund custodian, signs the following petty cash tickets:

Petty Cash

Ticket Number Item Amount

101 Office supplies \) 30

102 Cab fare for executive 20

103 Delivery of package across town 50

104 Business dinner 40

105 Merchandise inventory 90

On June 30, before replenishment, the fund contains these tickets plus cash of \(90.

The accounts affected by petty cash payments are Office Supplies, Travel Expense,

Delivery Expense, Entertainment Expense, and Merchandise Inventory.

Requirements

1. Explain the characteristics and the internal control features of an imprest fund.

2. On June 30, how much cash should the petty cash fund hold before it isreplenished?

3. Journalize all required entries to create the fund and replenish it. Includeexplanations.

4. Make the July 1 entry to increase the fund balance to \)375. Include an explanationand briefly describe what the custodian does.

Question: How does the Sarbanes-Oxley Act relate to internal controls?

Evaluating internal control over cash receipts Dogtopia sells pet supplies and food and handles all sales with a cash register. The cash register displays the amount of the sale. It also shows the cash received and any change returned to the customer. The register also produces a customer receipt butkeeps no internal record of the transactions. At the end of the day, the clerk counts the cash in the register and gives it to the cashier for deposit in the company bank account.

Requirements

1. Identify the internal control weakness over cash receipts.

2. What could you do to correct the weakness?

The Scott Sun & Shade Company had the following financial data at December 31, 2018:

Cash and cash equivalents $ 60,000

Total current liabilities 75,000

What is the cash ratio as of December 31, 2018, for Scott Sun & Shade?

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