Chapter 7: Q7RQ (page 411)
What are some limitations of internal controls?
There are four limitations of the internal controls.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
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.
Controlling petty cash Just Hangin’ Night Club maintains an imprest petty cash fund of \(150, which is under the control of Sandra Morgan. At March 31, the fund holds \)14 cash and petty cash tickets for office supplies, \(128, and delivery expense, \)15.
Requirements
1. Explain how an imprest petty cash system works.
2. Journalize the establishment of the petty cash fund on March 1 and the replenishing of the fund on March 31.
3. Prepare a T-account for Petty Cash and post to the account. What is the balance of the Petty Cash account at all times?
Journalizing petty cash
Prepare the journal entries for the following petty cash transactions of Everly Gaming
Supplies:
March 1 Established a petty cash fund with a \(250 balance.
31 The petty cash fund has \)24 in cash and \(235 in petty cash tickets
that were issued to pay for Office Supplies (\)35) and Entertainment
Expense (\(200). Replenished the fund and recorded the expenditures.
April 15 Increased the balance of the petty cash fund to \)300.
Why is it necessary to record journal entries after the bank reconciliation has been prepared? Which side of the bank reconciliation requires journal entries?
Preparing a bank reconciliation
The Cash account of Guard Dog Security Systems reported a balance of \(2,540 at December 31, 2018. There were outstanding checks totaling \)400 and a December 31 deposit in transit of \(100. The bank statement, which came from Park Cities Bank, listed the December 31 balance of \)3,340. Included in the bank balance was a collection of \(510 on account from Brendan Ballou, a Guard Dog customer who pays the bank directly. The bank statement also shows a \)30 service charge and $20 of interest revenue that Guard Dog earned on its bank balance. Prepare Guard Dog’s bank reconciliation for December 31.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
