Question

Exercise 7-02 The following control procedures are used at Torres Company for over-the-counter cash receipts. For each procedure, explain the weakness in internal control, and identify the control principle that is a violated. (b) For each weakness, suggest a change in procedure that will result in good internal control. 1. To minimize the risk of robbery, cash in excess of $100 is stored in an unlocked briefcase in the stockroom until it is deposited in the bank. (a) Weakness: Principle: (b) Change: Recommended 2. All over-the-counter receipts are processed by three clerks who use a cash register with a single cash drawer. (a) Weakness: Principle: (b) Recommended D) Change:

Answer 1

Requirement 1
Weakness	cash is Inadequately protected from theft	Leaving the cash in an unlocked briefcase is a violation of principle of safeguarding assets.
Principle	Physical controls	Safeguarding cash is a physical control
Recommended change	Cash should be stored in a safe until it is deposited in the bank.
Requirement 2 :
Weakness	Inability to establish responsibility for cash with a specific clerk	If three cashiers are using same register and drawer, then it will lead to confusion and in the event of cash misplacement they blame each other ,and it would be impossible to pinpoint one person responsible for it.
Principle	Establishment of responsibility
Recommended change	There should be separate registers and cash drawers for each clerk	It would be easy to recognise the person responsible for the cash entries.
Requirement 3 :
Weakness	The accountant should not handle the cash	If a person handles both deposits and records of the day's receipts, then he can easily manipulate the records and getaway with his/her mistakes.
Principle	Segregation of duties
Recommended change	The cashier's department should make the deposits.	Basic principle in accounting is to segregate record keeping from custody over assets.
Requirement 4 :
Weakness	cash is not independently counted	cashier may try to hide mistakes if he found that there was shortage in cash or may indulge in pilfering.
Principle	Independent internal verification
Recommended change	A cashier office supervisor should count.	At the end of the day, the cash is to be counted by supervisor and cash receipts are to be counted by respective cashier.Supervisor has to reconcile the cash with total receipts for that day.
Requirement 5:
Weakness	Cashiers are not bonded	This violates the principle of safeguarding assets. Cash is not adequately protected from embezzlement
Principle	Human resource controls
Recommended change	Employees who handles large amount cash should be bonded.	Before recruiting an employee for cash department, they must be bonded or atleast they should fidelity insurance.