Question

ternal Control and Cash an Company for cash receipts. metal box in the office where the office manager control E2.2 (L01, 2) C The following control procedures are used in Sheridan Company for cash. 1. To minimize the risk of robbery, cash in excess of $200 is stored in a locked metal bovi manager's office until it is deposited in the bank. All employees know where the keeps the key to the box. ny one of three employees may 2. The company has one cash register with a single cash drawer. Any one of three emplove operate the cash register. 3. All employees handling cash receipts are experienced and therefore are not bonded. 4. In order to increase efficiency, the assistant controller opens all of the mail, prepares the bank deposit and prepares the journal entries to record the cash receipts. 5. Due to a lack of storage space, all remittance advices and debit or credit card sales receipts are destroyed each weekend. Instructions a. For each procedure, explain the weaknesses in internal control, and identify the control activity that is violated. b. For each weakness, suggest a change in procedure that will result in good internal pe

Answer 1

Cash is one of the high risk areas in any entity. It is important to have certain internal controls in place to avoid misappropriation, theft or fraud of cash assets. Some of the important internal control functions observed in the cash receipts process are:

1. Accountability

2. Authorization and approval

3. Segregation of duty

4. Physical Security

5. Reconciliation and review

I have attached the image of the table explaining the following

1. Existing procedure/ internal control in Sheridan Company for cash

2. Weakness in existing internal control

3. Control activity being violated

4. Suggested procedure/change in existing procedure for good internal control against each weakness

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Weakness in Internal Control Control Activity being violated PROCEDURE/ Existing Internal Control Suggested Procedure for Good Internal Control Sr. No. To minimize the risk of robbery, cash in excess or $200 is stored in a locked metal box in the office iOnly the manager should know the location of the key Any deposit made or any other activity should be properly authorized by the manager All employees know where the office manager keeps the key to the box. This leads to a risk for opportunity fraud to take place manager's office until it is depasited in the bank. 1 Accountability and Access All employees know where the office manager keeps Ithe key to the box lij It should be properly accounted for, documented, secured and traceable to specific cash handlers i Cash is urie of the arens carrying high risk. With proper separation of duties, The company has one cash register with a single cash drawer Employees other than the accountant le. the one a single person does not have contral over the entire cash operation process Further it also Ieads to higher accountobility. who maintains the cash records may operate the cash register. Any ane of the 3 employees may operate the cash Separation/Segregation of duties 2 ii) Best practice is to have different peaple - Handle physical cash register -Record/Maintain.cosh reeords (depnsit, payments ctc.) Reconciliation of physical cash with books etc Employees handling such risky and critical activities must always be on Dayroll with a legally bonded cmployment letter All employees hand ling cash receipts are The employees are a flight risk as they are not experienced and therefore not bonded bonded. There are high chances that any of them may abandon if they pet an opportunity to do Accounlabilily il) Contract employees nre n flight risk and should be avuided for such jou misappropriation/theft/fraud oft cash Mail is the hasis for preparation of journalicing cash rolcs There must a Standard Oncrating l ure and contr of that any cash receipt

E PROCEDURE/ Existing Internal Control St.No. Control Activity being violated Weakness in Internal Control Suggested Procedure for Good Internal Control Mail is the basis for preparation of journalizing cash In order to increase efficiency, the assistant controller opens all of the mail, prepares the bank |deposit and prepares the journal entries to record lthe cash receipts ) There must a Standard Operating Procedure and control that any cash receipt must be made only after it is approved receipts authorized by the appropriate senior Since the basis of journalizing the cash receipts entries, only the transactions that have been i approved and authorized via mail shall be via mail. i) The same must communicated to all the emplayees and be implemented in practice Authorization and approval 4 accounted for in the books. If any cash receipt has not been approved for in the mail and only recorded in the cash register, the same transaction shall be missed to be recorded in the baoks of account. Destroyal of critical audit trail/evidence for cash accounting iJ Physical security of critical audit evidence (all remittance advices, debit or credit card sales receipts) is equally important as that of physical cash to avoid misappropriation, theft ar fraud Due to a lack of storage space, all remittance advices and debit or credit card sales receipts are Idestroyed each weekend Documentation and Physical Security iJThey should be physically secured and periodically accounted for and compared with books. 11