1.
Assignment: Internal Cash Control
·
Write a 700- to 1,050-word paper that addresses the
following questions:
o
Read scenario E4-5 on p. 194 of
your text. Answer questions A & B.
E4-5 At Idaho Company checks are not prenumbered because both the purchasing agent
and the treasurer are authorized to
issue checks. Each signer has access to unissued
checks
kept in an unlocked file
cabinet. The purchasing agent pays all bills pertaining to
goods
purchased for resale. Prior to payment, the purchasing agent determines that
the
goods have been received
and verifies the mathematical accuracy of the vendor’s invoice.
After
payment, the invoice is filed by vendor and the purchasing agent records the payment
in
the cash disbursements journal. The treasurer pays all other bills following
approval
by
authorized employees. After payment, the treasurer stamps all bills “paid,” files
them by payment date, and records the checks in the
cash disbursements journal. Idaho
Company
maintains one checking account that is reconciled by the treasurer.
Instructions
(a) List
the weaknesses in internal control over cash disbursements.
At the Idaho Company there were several weaknesses in their
internal control over their cash disbursements. They did not have prenumbered checks, by
having prenumbered checks it is easier to see when a check is missing and you
can track down the missing check easier if you know which check and how many
are missing. All checks should be kept
locked up with only one person having access.
The Idaho Company would benefit greatly by exercising something called
“segregation of duties”, which means having several people working together in
similar jobs but separate parts of the job.
Such as, there should only be one employee actually writing out
checks. It would create less room for
error or double paying when one person controls all check writing. They also
want just one person to receive goods and merchandise, one person verifying
invoices, and one person recording all payments and invoices, and one other
reconciling bank statements with company books.
(b) Write
a memo indicating your recommendations for improving company procedures.
After auditing your internal control procedures along with your
treasurer and purchasing agent duties, I would recommend the following changes
to your company’s procedures.
1)
Order and maintain prenumbered
checks. This would reduce the
possibility of missing checks and increasing your ability to track down missing
checks.
2)
Keep all checks and/or cash
locked up in a safe or security drawer, and only one person to hold the access
for that.
3)
Appoint one individual to do
all check writing. The check writer should
only write in the amount listed on the invoice. This would reduce the
likelihood of double payments or missing payments.
4)
Appoint a separate individual
to sign checks after verifying with invoice the amounts are exact.
5)
Segregate the duties held presently
by your purchasing agent and treasurer. One
person inventorying goods, one person verifying invoices as correct, one person
paying invoices, one person marking bills as paid, one person recording all
payments, and one other person reconciling bank statements with company
books.
By implementing these changes to your procedures, I believe you
will have less intentional and unintentional errors.
o Read scenario P4-1A on p. 197 of your text. Answer the
question at the bottom of the scenario piece.
P4-1A Guard Dog Company recently changed its system of internal
control over cash
disbursements.
The system includes the following features.
Instead
of being unnumbered and manually prepared, all checks must now be
prenumbered
and written by using the new
checkwriter purchased by the company. Before
a
check can be issued, each invoice must have the approval of Jane Bell, the purchasing
agent,
and Dennis Kurt,
the receiving department supervisor. Checks must be
signed by either Tom Kimball,
the treasurer, or Karen
Thews, the assistant treasurer. Before
signing
a check, the signer is expected to compare the amounts of the check with
the amounts on the invoice.
After
signing a check, the signer stamps
the invoice “paid” and inserts within the
stamp,
the date, check number, and amount of the check. The “paid” invoice is then
sent
to
the accounting department
for recording.
Blank
checks are stored in a safe
in the treasurer’s office. The combination to the
safe
is known by only the
treasurer and assistant treasurer. Each month the bank statement
is
reconciled with the bank balance
per books by the assistant chief accountant.
Instructions
Identify
the internal control principles and their application to cash disbursements of
Guard Dog Company.
The Guard Dog Company has a great system of internal control. They have prenumbered checks to reduce the
risk of missing checks. They purchased a
new checkwriter, which is a machine designed to only write checks. Invoices are approved by both the purchasing
agent to ensure the order was correct and by the receiving department to ensure
delivery is correct. The treasurer or
assistant treasurer are the only individuals authorized to sign checks, and
that is after verifying the check and the invoice amounts are the same. The check signer records the check
information onto the invoices and sending it to the accounting department. The accounting department records all
invoices and the corresponding checks. They keep all blank checks stored in a safe
and only the treasurer and assistant treasurer knows the combination. The assistant chief accountant then
reconciles with the bank every month.
o Read scenario P4-2A on p. 197 of your text.
Answer questions A, B, & C.
P4-2A The board of trustees of a local church is concerned
about the internal accounting
controls
pertaining to the offering collections made at weekly services. They ask you to
serve
on a three-person audit team with the internal auditor of the university and a
CPA
who
has just joined the church. At a meeting of the audit team and the board of
trustees
you
learn the following.
1.
The church’s board of trustees has delegated responsibility for the financial
management
and
audit of the financial records to the finance committee. This group prepares
the
annual budget and approves major disbursements but is not involved in
collections
or
recordkeeping. No audit has been made in recent years because the same
trusted
employee has kept church records and served as financial secretary for 15
years.
The church does not carry any fidelity insurance.
2.
The collection at the weekly service is taken by a team of ushers who volunteer
to
serve
for 1 month. The ushers take the collection plates to a basement office at the
rear
of the church. They hand their plates to the head usher and return to the
church
service.
After all plates have been turned in, the head usher counts the cash received.
The
head usher then places the cash in the church safe along with a notation of the
amount
counted. The head usher volunteers to serve for 3 months.
3.
The next morning the financial secretary opens the safe and recounts the
collection.
The
secretary withholds $150–$200 in cash, depending on the cash expenditures
expected
for
the week, and deposits the remainder of the collections in the bank. To
facilitate
the
deposit, church members who contribute by check are asked to make their
checks
payable to “Cash.”
4.
Each month the financial secretary reconciles the bank statement and submits a
copy
of
the reconciliation to the board of trustees. The reconciliations have rarely
contained
any
bank errors and have never shown any errors per books.
Instructions
(a) Indicate
the weaknesses in internal accounting control in the handling of collections.
There were several weaknesses in the internal control of the
church. The responsibility for
collecting, recording and storing cash collected from the collection plates are
held by volunteers who only serve on a limited basis. This allows a lot of room for unnoticed theft
on the part of the volunteers. There is
no way for the church secretary to ensure all money collected made it to the
next morning when he recounts the money.
The secretary also holds an undetermined amount of money before bank
depositing for expected expenses. This
makes it easy for theft on the part of the church secretary. Church members being encouraged to make
checks out for “cash” makes it easier for theft on the part of volunteers and
the secretary since checks made out for “cash”
can be cashed by anyone. The
reconciliation of bank statements rarely having bank errors or book errors
implies either intentional or unintentional theft on the part of the
secretary. No one is perfect and neither
can the bank nor the books ever show errors. The finance committee is a big
weakness since they prepare the annual budget and approve major
disbursements. They could easily approve
a large payment that would be either intentional or unintentional theft on the
part of one employee. Lastly, no audit
has been made for several years leaving any potential tracking of theft
unnoticed for many years increasing the overall amount of errors or theft.
(b)
List the improvements in internal control procedures that you plan to make at
the
next
meeting of the audit team for (1) the ushers, (2) the head usher, (3) the
financial
secretary,
and (4) the finance committee.
The following is a list of improvements for internal control
procedures.
1)
Eliminate the use of monthly
volunteers to be ushers. Require all
ushers to walk a forward pattern from the back to the front under the watch of
the head usher. All ushers are required
to turn in the baskets immediately upon reaching the front of the church. Each basket is counted and signed by the
collecting usher.
2)
The head usher should be an
employee of the church and immediately upon receipt of the collections, count
and drop money in a shoot that drops into the safe, and record into a record
book the amount dropped into safe.
3)
The financial secretary should
reconcile the amount left by the head usher with what is in the safe. The amount of petty cash kept should be
predetermined and recorded. Any petty
cash money used should have receipts to be reconciled with the record books
later.
4)
The finance committee should
order regular outside auditors and buy insurance to cover any
possibilities.
(b) What
church policies should be changed to improve internal control?
The church should change some of their policies in order to
improve internal control over their cash.
The church should increase the time volunteers should serve as
ushers. They should make the head usher
an employee of the church. Allow for
regular audits of the books and bank statements. The church should create a specific amount of
petty cash to be kept on hand and require receipts to replace any petty cash
spent.
·
Include how a company might use
the five basic principles of cash management to increase accuracy for a
business.
·
Format your
paper according to APA standards.
·
Post your paper as an attachment.
Formal Paper --
The Idaho Company
At the Idaho
Company there were several weaknesses in their internal control over their cash
disbursements. They did not have
prenumbered checks, by having prenumbered checks it is easier to see when a
check is missing and you can track down the missing check easier if you know
which check and how many are missing. All
checks should be kept locked up with only one person having access. The Idaho Company would benefit greatly by
exercising something called “segregation of duties”, which means having several
people working together in similar jobs but separate parts of the job. Such as, there should only be one employee
actually writing out checks. It would
create less room for error or double paying when one person controls all check
writing. They also want just one person to receive goods and merchandise, one
person verifying invoices, and one person recording all payments and invoices,
and one other reconciling bank statements with company books.
Memo to Idaho Company
After auditing
your internal control procedures along with your treasurer and purchasing agent
duties, I would recommend the following changes to your company’s procedures.
1)
Order and maintain prenumbered
checks.
2)
Keep all checks and/or cash
locked up in a safe or security drawer, and only one person to hold the access
for that.
3)
Appoint one individual to do
all check writing. The check writer
should only write in the amount listed on the invoice. This would reduce the
likelihood of double payments or missing payments.
4)
Appoint a separate individual
to sign checks after verifying with invoice the amounts are exact.
5)
Segregate the duties held
presently by your purchasing agent and treasurer. One person inventorying goods, one person
verifying invoices as correct, one person paying invoices, one person marking
bills as paid, one person recording all payments, and one other person
reconciling bank statements with company books.
By implementing
these changes to your procedures, I believe you will have less intentional and
unintentional errors.
The Guard Dog Company
The Guard Dog
Company has a great system of internal control.
They have prenumbered checks and have purchased a new checkwriter, which
is a machine designed to write checks.
Invoices are approved by both the purchasing agent to ensure the order
was correct and by the receiving department to ensure delivery is correct. The treasurer or assistant treasurer are the
only individuals authorized to sign checks, and only after verifying the check
and the invoice amounts are the same.
The check signer records the check information onto the invoices and
sending it to the accounting department.
The accounting department records all invoices and the corresponding
checks. They keep all blank checks
stored in a safe with only the treasurers knowing the combination. The assistant chief accountant then
reconciles with the bank every month.
The Church
There were
several weaknesses in the internal control of the church. The responsibility for collecting, recording
and storing cash collected from the collection plates are held by volunteers
who only serve on a limited basis. This
allows a lot of room for unnoticed theft on the part of the volunteers. There is no way for the church secretary to
ensure all money collected made it to the next morning when he recounts the
money. The secretary also holds an
undetermined amount of money before bank depositing for expected expenses. This makes it easy for theft on the part of
the church secretary. Church members
being encouraged to make checks out for “cash” makes it easier for theft, since
checks made out for “cash” can be cashed
by anyone. The reconciliation of bank
statements rarely having bank errors or book errors implies either intentional
or unintentional theft. No one is
perfect and neither can the bank nor the books ever show errors. The finance
committee is a big weakness since they prepare the annual budget and approve
major disbursements. They could easily
approve a large payment that would be either intentional or unintentional
theft. Lastly, no audit has been made
for several years leaving any potential tracking of theft unnoticed for many
years increasing the overall amount of errors or theft.
The following is
a list of improvements for internal control procedures.
1)
Eliminate the use of monthly
volunteers to be ushers. All ushers are
required to turn in the baskets immediately upon reaching the front of the
church. Each basket is counted and
signed by the collecting usher.
2)
The head usher should be an
employee of the church and immediately upon receipt of the collections, count
and drop money in a shoot that drops into the safe, and record into a record
book the amount dropped into safe.
3)
The financial secretary should
reconcile the amount left by the head usher with what is in the safe. The amount of petty cash kept should be
predetermined and recorded. Any petty
cash money used should have receipts to be reconciled with the record books
later.
4)
The finance committee should
order regular outside auditors and buy insurance to cover any
possibilities.
The church should
change some of their policies in order to improve internal control over their
cash. The church should increase the
time volunteers should serve as ushers.
They should make the head usher an employee of the church. Allow for regular audits of the books and
bank statements. The church should
create a specific amount of petty cash to be kept on hand and require receipts
to replace any petty cash spent.
The Five Basic
Principles
There are
five basic principles to cash management.
How a company might use them are important to increase accuracy for a
business. Increasing the speed of collecting
receivables can increase the amount of cash you get in a timely basis. Keeping your inventory low can decrease the
amount of money you will spend immediately and allow for a bigger profit. Delaying payment of your liabilities can
allow for more time to use cash you would not have by paying bills early. Planning the timing of major expenses can
ensure that you only spend money when you have an excess of money. Then, invest any idle cash, this will help
make money with money that normal would not be doing anything.
