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
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?
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
How do businesses control cash receipts by mail?
Correcting internal control weaknesses
Each of the following situations has an internal control weakness.
a. Upside-Down Applications develops custom programs to customers’ specifications.
Recently, development of a new program stopped while the programmers
redesigned Upside-Down’s accounting system. Upside-Down’s accountants could
have performed this task.
b. Norma Rottler has been your trusted employee for 24 years. She performs all cashhandling
and accounting duties. Norma just purchased a new luxury car and a new
home in an expensive suburb. As owner of the company, you wonder how she
can afford these luxuries because you pay her only $30,000 a year and she has no
source of outside income.
c. Izzie Hardwoods, a private company, falsified sales and inventory figures in order
to get an important loan. The loan went through, but Izzie later went bankrupt and
could not repay the bank.
d. The office supply company where Pet Grooming Goods purchases sales receipts
recently notified Pet Grooming Goods that its documents were not prenumbered.
Howard Mustro, the owner, replied that he never uses receipt numbers.
e. Discount stores such as Cusco make most of their sales in cash, with the remainder
in credit card sales. To reduce expenses, one store manager ceases purchasing
fidelity bonds on the cashiers.
f. Cornelius’s Corndogs keeps all cash receipts in an empty box for a week because
the owner likes to go to the bank on Tuesdays when Joann is working.
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.
Question: Understanding bank account controls
Answer the following questions about the controls in bank accounts:
Requirements
1. Which bank control protects against forgery?
2. Which bank control reports the activity in the customer’s account each period?
3. Which bank control confirms the amount of money put into the bank account?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
