Question

Continuing Cookie Chronicle
(Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 6.)
CCC7 Part 1 Natalie is struggling to keep up with the recording of her accounting
transactions. She is spending a lot of time marketing and selling mixers and giving her
cookie classes. Her friend John is an accounting student who runs his own accounting
service. He has asked Natalie if she would like to have him do her accounting.
John and Natalie meet and discuss her business. John suggests that he do the following
for Natalie.
1. Hold onto cash until there is enough to be deposited. (He would keep the cash locked
up in his vehicle). He would also take all of the deposits to the bank at least twice a
month.
2. Write and sign all of the checks.
3. Record all of the deposits in the accounting records.
4. Record all of the checks in the accounting records.
5. Prepare the monthly bank reconciliation.
6. Transfer all of Natalie’s manual accounting records to his computer accounting program.
John maintains all of the accounting information that he keeps for his clients
on his laptop computer.
7. Prepare monthly financial statements for Natalie to review.
8. Write himself a check every month for the work he has done for Natalie.
Instructions
Identify the weaknesses in internal control that you see in the system that John is recommending.
(Consider the principles of internal control identified in the chapter.) Can
you suggest any improvements if John is hired to do Natalie’s accounting?
Part 2 Natalie decides that she cannot afford to hire John to do her accounting. One
way that she can ensure that her cash account does not have any errors and is accurate
and up-to-date is to prepare a bank reconciliation at the end of each month.
Natalie would like you to help her. She asks you to prepare a bank reconciliation for
June 2012 using the following information.
GENERAL LEDGER—COOKIE CREATIONS INC.
Cash
Date Explanation Ref. Debit Credit Balance
2012
June 1 Balance 2,657
1 750 3,407
3 Check #600 625 2,782
3 Check #601 95 2,687
8 Check #602 56 2,631
9 1,050 3,681
13 Check #603 425 3,256
20 155 3,411
28 Check #604 297 3,114
28 110 3,224
2 chapter 7 Fraud, Internal Control, and Cash
Additional information:
1. On May 31, there were two outstanding checks: #595 for $238 and #599 for $361.
2. Premier Bank made a posting error to the bank statement: check #603 was issued for
$425, not $452.
3. The deposit made on June 20 was for $125 that Natalie received for teaching a class.
Natalie made an error in recording this transaction.
4. The electronic funds transfer (EFT) was for Natalie’s cell phone use. Remember that
she uses this phone only for business.
5. The NSF check was from Ron Black. Natalie received this check for teaching a class
to Ron’s children. Natalie contacted Ron and he assured her that she will receive a
check in the mail for the outstanding amount of the invoice and the NSF bank charge.
Instructions
(a) Prepare Cookie Creations’ bank reconciliation for June 2012.
(b) Prepare any necessary general journal entries.
(c) If a balance sheet is prepared for Cookie Creations Inc. at June 30, 2012, what balance
will be reported as cash in the current assets section

Answer 1

Part 1 The following weaknesses exist in the internal control system recommended by John: 1. Holding on to cash for 15 days and keeping it locked in a vehicle by is a major internal control weakness because there is a high risk of theft in such situation an individual 2. Writing and signing of check by the same person is an intemal control weakness because there is a risk of fraud. Also, it is against the principle of segregation of duties 3. Preparation of bank reconciliation by the person who keeps the accounts is an internal control weakness as it provides opportunity to commit fraud and easily hide it. Also, it is against the principle of independent review. 4. Keeping the business's accounting records in an individual's personal laptop is internal control weakness because it is susceptible to fraudulent alteration an 5. Writing of checks by because it could lead to fraud. an individual for himself is an internal control weakness The following improvements are suggested in the given scenario: 1. Cash should be deposited in a bank on daily basis 2. Checks should be signed by Natalie. John should only be allowed to write the checks, but the signing authority should remain with Natalie. 3. Bank reconciliation should not be prepared by John as he keeps the accounts. It should be either prepared by Natalie or by another employee who does not maintains the accounts 4. The business's accounting records should not be kept in John's personal laptop. It should be kept in a computer that is placed within Natalie's office 5. John should not be allowed to write checks for himself. Natalie should write and sign checks for payment to John 6. Natalie should perform regular independent review of accounts and financial statements prepared by John