ACC225 Week 8 Assignment

Problem 8-1A

Analyzing internal control

C1

For each of these five separate cases, identify the principle of internal control that is violated.

Recommend what the business should do to ensure adherence to principles of internal control.

1. Heather Flatt records all incoming customer cash receipts for her employer and posts the customer payments to their respective accounts. – The internal control that was overlooked or violated is “divide responsibility for related transactions”.  There should be two individuals doing these two related tasks.  This would serve as a check each for the other to prevent errors or intentional mistakes.  The company should designate another employee to do either the incoming cash receipts or posting to customer accounts. 

2. At Netco Company, Jeff and Jose alternate lunch hours. Jeff is the petty cash custodian, but if someone needs petty cash when he is at lunch, Jose fills in as custodian. – The petty cash custodian should never alter between two individuals.  There is no internal control of separation of duties.  In case of theft or error, neither employee can ethically be held responsible for the petty cash since there would be no way to tell which was in charge during the error.  This company should pick between Jeff and Jose to be custodian alone.

3. Nadine Cox posts all patient charges and payments at the P-Town Medical Clinic. Each night

Nadine backs up the computerized accounting system to a tape and stores the tape in a locked file at her desk. – This example violates the internal control that asks for separation of duties.  Nadine has no secondary person to ensure that her input was correct before she backs up the computer and files the tapes.  This company should have a separate person in control of the locked drawers and/or backing up the computer.  Putting another person in either position would help keep internal control, two people would be ideal, one to back up and one to keep the locked cabinet. 

4. Barto Sayles prides himself on hiring quality workers who require little supervision. As office manager, Barto gives his employees full discretion over their tasks and for years has seen no reason to perform independent reviews of their work. – This violates the internal control of performing regular and independent reviews of employee work.  The fact that there has been no visible reason to perform independent reviews is not adequate evidence that it is not needed.  This could simply be a case of no one has been caught yet instead of no one is misbehaving, but without the reviews the manager may never know. This manager should instate independent and regular reviews.

5. Desi West’s manager has told her to reduce costs. Desi decides to raise the deductible on the plant’s property insurance from $5,000 to $10,000. This cuts the property insurance premium in half. In a related move, she decides that bonding the plant’s employees is a waste of money since the company has not experienced any losses due to employee theft. Desi saves the entire amount of the bonding insurance premium by dropping the bonding insurance. – This violates the internal control of keeping all employees bonded.  This internal control protects the company against employee theft.  Just because there have been no issues, does not mean there will not be and Desi should not ever drop bonding insurance. 

Problem 8-3A

Establish, reimburse, and increase

petty cash

P2

Inoke Gallery had the following petty cash transactions in February of the current year:

Feb. 2 Wrote a $300 check, cashed it, and gave the proceeds and the petty cashbox to Bo Brown, the petty cashier.

5 Purchased bond paper for the copier for $10.13 that is immediately used.

9 Paid $22.50 COD shipping charges on merchandise purchased for resale, terms FOB shipping point. Metro uses the perpetual system to account for merchandise inventory.

12 Paid $9.95 postage to express mail a contract to a client.

14 Reimbursed Alli Buck, the manager, $58 for business mileage on her car.

20 Purchased stationery for $77.76 that is immediately used.

23 Paid a courier $18 to deliver merchandise sold to a customer, terms FOB destination.

25 Paid $15.10 COD shipping charges on merchandise purchased for resale, terms FOB shipping point.

27 Paid $64 for postage expenses.

28 The fund had $21.23 remaining in the petty cash box. Sorted the petty cash receipts by accounts affected and exchanged them for a check to reimburse the fund for expenditures.

The fund amount is also increased to $400.

Required

1. Prepare the journal entry to establish the petty cash fund.

2. Prepare a petty cash payments report for February with these categories: delivery expense, mileage expense, postage expense, merchandise inventory (for transportation-in), and office supplies expense. Sort the payments into the appropriate categories and total the expenditures in each category

3. Prepare the journal entries for part 2 to both (a) reimburse and (b) increase the fund amount.

Date	Accounts		Debit	Credit
Feb 2	Petty Cash		300
		Cash		300
Feb 28	Delivery expense		82
	Mileage expense		58
	Postage expense		9.95
	Merchandise inventory (for transportation-in)		37.60
	Office supplies expense		87.89
	Cash over or short		3.33
	Petty Cash		100
		Cash		378.77