Question

A. Internal Control The following control procedures are used at Torres Company for over-the-counter cash receipts. 1. To minimize the risk of robbery, cash in excess of $100 is stored in an unlocked briefcase in the stock room until it is deposited in the bank. 2. All over-the-counter receipts are processed by three clerks who use a cash register with a single cash drawer. 3. The company accountant makes the bank deposit and then records the day's receipts. 4. At the end of each day, the total receipts are counted by the cashier on duty and reconciled to the cash register total. 5. Cashiers are experienced; they are not bonded. Instructions a. For each procedure, explain the weakness in internal control, and identify the control principle that is violated. b. For each weakness, suggest a change in procedure that will result in good internal control. B. Petty Cash Kamil Inc. maintains a petty cash fund for small expenditures. These transactions occurred during the month of August. Aug. 1 Established the petty cash fund by writing a check payable to the petty cash custodian for $250. 15 Replenished the petty cash fund by writing a check for $199.60. On this date, the fund consisted of $50.40 in cash and these petty cash receipts: freight-out $85.10, entertainment expense $42, postage expense $38.00, and miscellaneous expense $32.50. 16 Increased the amount of the petty cash fund to $400 by writing a check for $150. 31 Replenished the petty cash fund by writing a check for $372. On this date, the fund consisted of $28 in cash and these petty cash receipts: postage expense $185, entertainment expense $150.90, and freight-out $39.50.

Answer 1

A.

1.In the first case, as the cash is being stored in an unlocked briefcase in the stock room instead of cashier's cabin is absolutely a weakness in control. By doing this the principle of 'custody of assets' is violated. Keeping a custodian for cash would be a change in procedure that will result in good internal control.

2.As all the three can has access to cash register with a single cash drawer, there is a very good chance to embezzle the cash because it wouldn't be possible to identify which one them actually took the money away. Here the Segregation of Duties principle has been violated. By segregating the duties like One should have access only to collect the receipts and the other person should record it in the register and other person alone should have the access to the drawer. This change in procedure would result in a very good internal control process.

3.In this case also as the single person is depositing and also recording the day's receipt, he can easily miss an entry to the register and take that cash away with him. So here Control principle called segregation of duties is violated. For this, two persons should be assigned I.e. a person should deposit the receipt and the other should record it.

4.The person on duty is not supposed to do the reconciliations. A seperate person should perform the reconciliations at the end of the day. Here 'Establishment of Responsibilities' principle is violated. By keeping a separate person for making the reconciliations would result in a good internal control.

5.Eventhough cashiers are experienced, it is hold to them responsible unless they are finely bonded. Here the principle of insurance and bonding are violated. By having the cashier bonded the company can rest assured that its cash won't be misappropriated. This would result in a good internal control.

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