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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

What is a 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.

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?

What are the five components of internal control? Briefly explain each component.

What are some common controls used with a bank account?

See all solutions

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