Finance - FinalQuiz

Finance

Q: For each of the independent cases below, identify and describe the principle of internal control that is violated and recommend what should be done to remedy the violation. Answer: Case A. The company records each sale on a preprinted invoice. Sometimes, invoices are spoiled when they are prepared and must be voided. As such, the invoices are not prenumbered. Instead, the sales clerk writes the next number onto each invoice. Case B. The company is a very small business. Jay Nevins, one of the two office clerks, opens the mail each day and removes the cash receipts that come in the mail. Jay then records the receipts in the cash records and the customer's account and deposits the cash in the bank. Case C. Alice Nash, the owner of the A&A Clothing store prides herself on hiring only the most competent employees. Nash believes that since these employees are highly competent, she can trust them, and feels there is no need to purchase more than one cash register drawer. As such, all of the companys employees operate out of that same cash register drawer. Case D. In order to save money, the company has decided to stop bonding the cashiers who handle about $10,000 in cash each day. Answer: Case A. Document procedures To ensure that a company knows what transactions have been or need to be entered into the accounting system, most companies assign sequential numbers to their documents and check that they are used in numerical sequence. This check occurs frequently to ensure that every transaction is recorded and that each document number corresponds to one and only one accounting entry. Case B. Segregate duties Segregation of duties involves assigning responsibilities so that one employee cannot make a mistake or commit a dishonest act without someone else discovering it. Segregation of duties is most effective when a company assigns responsibilities for related activities to two or more people and assigns responsibilities for recordkeeping to people who do not have access to the assets for which they are accounting. Nevins has custody of the cash and maintains the records of cash. These responsibilities with respect to cash receipts should be split up among several employees. Upon opening the mail, the mail clerk should list all amounts received on a cash receipt list, which also includes the customers names and the purpose of each payment. Ideally, someone supervises the clerk who opens the mail to ensure that he or she takes no cash that may have been remitted by a customer. As evidence of this supervision, both the mail clerk and the supervisor sign the completed cash receipts list. After these steps have been completed, the cash received is separated from the record of cash received. Checks and money orders are given to the person who prepares the bank deposit whereas the cash receipts list and remittance advices are sent to the accounting department. Case C. Establish responsibility Whenever possible, assign each task to only one employee so that the company is able to determine who caused any errors or thefts that occur. Whenever possible, Nash should assign each task to only one employee. Doing so will allow Nash to determine who caused any errors or thefts that occur. That is why retail companies assign a separate cash register drawer to each employee. If two or more cashiers were to use the same drawer, it would be impossible to know which cashier caused the drawer to be short on cash. With only one person responsible for adding and removing money from the drawer, there can be no doubt about who is responsible for a cash shortage. Case D. Bonding employees The five principles of internal control do not represent all possible forms of internal control. Many other policies and procedures exist, some of which contribute in subtle ways to internal control. A control that can limit losses from theft is the bonding of employees, which involves obtaining an insurance policy that partially reimburses the organization for losses caused by employee fraud.

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