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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

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

Journalizing credit card sales 2018

Sep. 1 Recorded National Express credit card sales for \(96,000, net of processor fee of 1%. Ignore Cost of Goods Sold.

15 Recorded ValueMax credit card sales of \)80,000. Processor charges a 1.5% fee. ValueMax charges the fee at the end of the month, therefore Marathon uses the gross method for these credit card sales. Ignore Cost of Goods Sold.

30 ValueMax collected the fees for the month of September. Assume the

September 15 transaction is the only ValueMax credit card sale. Journalize all entries required for Marathon Running Shoes.

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

Levon Helm was a kind of one-person mortgage broker. He would drive around Tennessee looking for homes that had second mortgages, and if the criteria were favorable, he would offer to buy the second mortgage for “cash on the barrelhead.” Helm bought low and sold high, making sizable profits. Being a small operation, he employed one person, Cindy Patterson, who did all his bookkeeping. Patterson was an old family friend, and he trusted her so implicitly that he never checked up on the ledgers or the bank reconciliations. At some point, Patterson started “borrowing” from the business and concealing her transactions by booking phony expenses. She intended to pay it back someday, but she got used to the extra cash and couldn’t stop. By the time the scam was discovered, she had drained the company of funds that it owed to many of its creditors. The company went bankrupt, Patterson did some jail time, and Helm lost everything

Requirements

  1. What was the key control weakness in this case?
  2. Many small businesses cannot afford to hire enough people for adequate separation of duties. What can they do to compensate for this?

Using Excel for a Bank Reconciliation

Download an Excel template for this problem online in MyAccountingLab or athttp://www.pearsonhighered.com/Horngren.

Lori Anders of Wilderness Associates is getting ready to prepare the October bank reconciliation.

The cash balance on the books of Wilderness Associates on October 31 is \(3,546.

Lori reviews the bank statement, and notes the checking account balance at October 31 is \)2,445. The bank statement also

reveals that the bank collected a note receivable on behalf of Wilderness Associates—the principal was \(1,500 and the interest

was \)15. One customer’s check for \(29 was returned by the bank for insufficient funds. Two additional items on the bank statement

were the monthly EFT for the utilities, \)250, and the bank service fee of \(12. Lori notes that the cash deposit made on

October 31 of \)3,300 does not appear on the statement, and that three checks totaling $975 had not cleared the bank account

when the bank statement was prepared.

Requirements

1. Prepare the bank reconciliation for Wilderness Associates at October 31, 2018. Format appropriate cells with dollar signs and double

underlines. Use Excel formulas to calculate subtotals and totals.

2. Journalize the entries based on the bank reconciliation. For dollar amounts, use cell references on bank reconciliation

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