Question

E7.2 (LO 1, 2) C The following control procedures are used in Sheridan Company for cash receipts. Identify weaknesses in internal control over cash receipts and suggest improvements. 1. To minimize the risk of robbery, cash in excess of $200 is stored in a locked metal box in the office manager's office until it is deposited in the bank. All employees know where the office manager keeps the key to the box. 2. The company has one cash register with a single cash drawer. Any one of three employees may 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 control.

Answer 1

PART – 1)

Weakness: Manager has locked cash in the metal box but the key of that box is known to every employee. Such case has the chance of theft by some dishonest employees.

Control activity violated: Physical control

Recommended activity: The manager should lock the cash into a locker whose key should is not known to any employee, so that the cash may be saved from being theft.

PART – 2)

Weakness: The company is not able to establish responsibility to any specific employee for maintaining cash register. It will hamper effectiveness of work and the company is also not able to fix responsibility on any single employee.

Control activity violated: Establishment of responsibility

Recommended activity: The company should maintain separate codes for every employee to maintain cash register or separate cash register is required to maintain for each employee. If the firm maintain only one cash register then every employee is required to verify cash total during their shifts.

PART – 3)

Weakness: Every employee is handling cash and they are not bonded which may increase the chance of theft.

Control activity violated: Bonding employee who handle cash        

Recommended: The company is required to bond the employees so that the firm can ensure that employee will securely manage the cash and this activity will also increase productivity.

PART – 4)

Weakness: The Assistant controller do every work which has the chance of fraud as no single employee should allowed to take responsibility of every work.

Control activity violated: Segregation of duties

Recommended: The company should segregate the work among employees and no person is allowed to take responsibility for all activities.

PART – 5)

Weakness: The company has destroyed all evidence and source documents related to the transaction that will provide problem in reconciliation of books with the source document that will mismatch the books of accounts.

Control activity violated: Adequate documents and records

Recommended: The firm should secure all such source documents like sales receipt, invoices etc. so that it will be able to reconcile these source document with books of accounts and also, these documents will help in audit.