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Correcting internal control weaknesses

Each of the following situations has an internal control weakness.

a. Jade Applications has decided that one way to cut costs in the upcoming year is to

fire the external auditor. The business believes that the internal auditor should be

able to efficiently monitor the company’s internal controls.

b. In an effort to minimize the amount of paperwork, Ross Homes has decided that it

will not keep copies of customer invoices related to sales revenue. Ross believes that

this effort will minimize the amount of data storage the company will have to pay for.

c. Elle Bee, a trusted employee for many years, has never taken a vacation. The owner

believes that he’s lucky that she is so committed to her job.

d. The Medicine Chest Company keeps a small petty cash fund to handle small cash

transactions. Because no one wants to volunteer to be the custodian, the business

manager has decided that all employees should have access to the petty cash. She

figures that as long as each employee fills out a petty cash ticket, then there are

proper controls in place.

e. Due to the cost of maintaining the security cameras, Wings and More has decided

that it will remove the cameras that monitor the cash register.

f. Bryan Miller, manager of Hardware Emporium, prides himself on hiring

exceptionally skilled employees who need no training to do their jobs.

Requirements

1. Identify the missing internal control characteristics in each situation.

2. Identify the possible problem caused by each control weakness.

3. Propose a solution to each internal control problem.

Short Answer

Expert verified

To make books more accurate the company needs to hire an external auditor.

Step by step solution

01

Definition of internal control

Internal controls are those controls that affect the internal environment of the company. Internal controls enhance the smooth working of the company.

02

Missing internal control weakness

  1. In the first situation, the missing internal control is the lack of external audit.
  2. In the second situation, the missing internal control is the documentation.
  3. In the given situation, the missing internal control is vacation and job rotation.
  4. In the given situation, the missing internal control is the assignment of responsibilities.
  5. In the given situation, the missing internal control is the lack of electronic devices.
  6. In the given situation, the missing internal control is lack of training.
03

Effect of weaknesses

  1. In the lack of an external audit, the company’s books are not created accurately because the external auditor is the person who tells the company about mistakes in the books.
  2. In lack of documents, the sale revenue record cannot be maintained properly. This will increase the chances of fraud by employees in the revenue.
  3. In this, no job rotation decreases the efficiency of work. If the employee does not go on vacation, this will affect his work efficiency.
  4. In this, not assigning the responsibilities cause a big problem for the company because the petty cash fund is not managed properly.
  5. In this, no camera in the workplace increases the theft cases in the company.
  6. Without job training, an employee cannot work efficiently and make many mistakes.
04

Solution of weaknesses

  1. The company must hire an external auditor.
  2. The company has to make a copy and digitalize every sale revenue.
  3. In this, the company can do job rotation.
  4. In this, the company must assign the responsibility of the custodian to employees.
  5. In this, the company need to put cameras to reduce the chances of theft.
  6. The company needs to give training to new employees.

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Most popular questions from this chapter

Preparing a bank reconciliation

Jim Root Corporation operates four bowling alleys. The business just received the

On October 31, 2018, bank statement from City National Bank, and the statement shows

an ending balance of \(910. Listed on the statement are an EFT rent collection of

\)440, a service charge of \(7, NSF checks totaling \)50, and a \(23 charge for printed

checks. In reviewing the cash records, the business identified outstanding checks totaling

\)440 and a deposit in transit of \(1,800. During October, the business recorded a

\)260 check by debiting Salaries Expense and crediting Cash for \(26. The business’s

Cash account shows an October 31 balance of \)2,144.

Requirements

1. Prepare the bank reconciliation at October 31.

2. Journalize any transactions required from the bank reconciliation.

Preparing a bank reconciliation and journal entries

The May cash records of Donald Insurance follow:

Cash Receipts Cash Payments

Date Cash Debit Check No. Cash Credit

May 4 \( 4,230 1416 \) 890

9 520 1417 120

14 530 1418 630

17 1,950 1419 1,090

31 1,840 1420 1,420

1421 900

1422 670

Donald’s Cash account shows a balance of \(17,750 at May 31. On May 31, Donald

Insurance received the following bank statement:

Deposits and other Credits:

May 10

May 1

May 5

May 15

May 18

May 22

Checks and other Debits:

8

11 (check no. 1416)

19

22 (check no. 1417)

29 (check no. 1418)

31 (check no. 1419)

May

May

May

May

May

May

May 31

Ending Balance

Beginning Balance

EFT \) 450

NSF

EFT

BC

\( 18,730

1,700

890

1,100

120

520

4,230

530

1,950

\) 14,400

9,380

375

630

1,900

35 (5,050)

Bank Statement for May

SC

Explanations: BC–bank collection; EFT–electronic funds transfer;

NSF–nonsufficient funds checks; SC–service charge

Additional data for the bank reconciliation follow:

a. The EFT credit was a receipt of rent. The EFT debit was an insurance

payment.

b. The NSF check was received from a customer.

c. The \(1,700 bank collection was for a note receivable.

d. The correct amount of check 1419, for rent expense, is \)1,900. Donald’s controller

mistakenly recorded the check for $1,090.

Requirements

1. Prepare the bank reconciliation of Donald Insurance at May 31, 2018.

2. Journalize any required entries from the bank reconciliation

Preparing a bank reconciliation and journal entries

The August 31 bank statement of Well Healthcare has just arrived from United Bank.

To prepare the bank reconciliation, you gather the following data:

a. The August 31 bank balance is \(4,540.

b. The bank statement includes two charges for NSF checks from customers. One is

for \)380 (#1), and the other is for \(180 (#2).

c. The following Well Healthcare checks are outstanding at August 31:

Check No. Amount

237 \) 80

288 190

291 570

294 600

295 30

296 70

d. Well collects from a few customers by EFT. The August bank statement lists a

\(1,200 EFT deposit for a collection on account.

e. The bank statement includes two special deposits that Well hasn’t recorded yet:

\)800 for dividend revenue, and \(120 for the interest revenue Well earned on its

bank balance during August.

f. The bank statement lists a \)50 subtraction for the bank service charge.

g. On August 31, the Well treasurer deposited \(260, but this deposit does not appear

on the bank statement.

h. The bank statement includes a \)1,050 deduction for a check drawn by Multi-State

Freight Company. Well notified the bank of this bank error.

i. Well’s Cash account shows a balance of $2,800 on August 31.

Requirements

1. Prepare the bank reconciliation for Well Healthcare at August 31, 2018.

2. Journalize any required entries from the bank reconciliation. Include anexplanation for each entry.

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.

Why is it necessary to record journal entries after the bank reconciliation has been prepared? Which side of the bank reconciliation requires journal entries?

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