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Chapter 7: Q3RQ (page 411)
What are the five components of internal control? Briefly explain each component.
The five components of the internal control are:
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What are some common controls used with a bank account?
Preparing a bank reconciliation and journal entries
This problem continues the Canyon Canoe Company situation from Chapter 6.
Canyon Canoe Company has decided to open a new checking account at River
Nations Bank during March 2019. Canyon Canoe Company’s March Cash T-account
for the new cash account from its general ledger is as follows:
Cash—River Nations Bank Checking Account
Balance
Deposit
Deposit
Deposit
Deposit
200
4,300
750
1,675
1,500
14,165
Mar. 1
2
13
20
27
Deposit
10,000
2,325
2,750
4,500
31 3,490
Mar. 2
4
9
14
21
Ck#101
Ck#102
Ck#103
Ck#104
Ck#105
175
300
28
30
Ck#106
Ck#107
Balance
Canyon Canoe Company’s bank statement dated March 31, 2019, follows:
Beginning Balance, March 1, 2019
Deposits and other credits:
Mar. 2
14
21
28
29 EFT Sport Shirts(1)
(1) Sport Shirts is a customer making a payment on account.
(2) Bank Checks is a company that prints business checks (considered
a bank expense) for Canyon Canoe Company
\(10,000
2,325
2,750
4,500
500
Checks and other debits:
Mar. 2 EFT to Bank Checks(2)
Ending balance, March 31, 2019
\) 0
31 Interest Revenue 45
3 Ck#101
6 Ck#102
15 Ck#104
16 Ck#103
55
200
4,300
1,675
750
28 EFT to Rivers Energy(3) 270
29 Ck#106 175
31 Bank service charge 70
20,120
(7,495)
$ 12,625
(3) Rivers Energy is a utility provider.
Requirements
1. Prepare the bank reconciliation at March 31, 2019.
2. Journalize any transactions required from the bank reconciliation.
3. Compute the adjusted account balance for the Cash T-account, and denote thebalance as End. Bal. Does the adjusted balance of the Cash T-account match theadjusted book balance on the bank reconciliation?
Identifying internal controls. Consider each situation separately. Identify the missing internal control procedure from these characteristics:
• Assignment of responsibilities
• Separation of duties
• Audits
• Electronic devices
• Other controls (specify)
a. While reviewing the records of Quality Pharmacy, you find that the same Team member orders merchandise and approves invoices for payment.
b. Business is slow at Amazing Amusement Park on Tuesday, Wednesday, and Thursday nights. To reduce expenses, the business decides not to use a ticket taker on those nights. The ticket seller (cashier) is told to keep the tickets as a record of the number sold.
c. The same trusted team member has served as a cashier for 12 years.
d. When business is brisk, Fast Mart deposits cash in the bank several times during the day. The manager at one store wants to reduce the time employees spend delivering cash to the bank, so he starts a new policy. Cash will build up over weekends, and the total will be deposited on Monday.
e. Grocery stores such as Convenience Market and Natural Foods purchase most merchandise from a few suppliers. At another grocery store, the manager decides to reduce paperwork. He eliminates the requirement that the receiving department prepare a receiving report listing the goods actually received from
the supplier.
Understanding the Sarbanes-Oxley Act and identifying internal control strengths and weaknesses. The following situations suggest a strength or a weakness in internal control.
a. Top managers delegate all internal control procedures to the accounting department.
b. Accounting department staff (or the bookkeeper) orders merchandise and approves invoices for payment.
c. Cash received over the counter is controlled by the sales clerk, who rings up the sale and places the cash in the register. The sales clerk matches the total recorded by the register to each day’s cash sales.
d. The employee who signs checks need not examine the payment packet because he is confident the amounts are correct.
Requirements
1. Define internalcontrol.
2. The system of internal control must be tested by external auditors. What law or rule requires this testing?
3. Identify each item in the list above as either a strength or a weakness in internal control, and give your reason for each answer.
Classifying bank reconciliation items
The following items could appear on a bank reconciliation:
a. Outstanding checks, \(670.
b. Deposits in transit, \)1,500.
c. NSF check from customer, no. 548, for \(175.
d. Bank collection of note receivable of \)800, and interest of \(80.
e. Interest earned on bank balance, \)20.
f. Service charge, \(10.
g. The business credited Cash for \)200. The correct amount was \(2,000.
h. The bank incorrectly decreased the business’s account by \)350 for a check written
by another business.
Classify each item as (1) an addition to the book balance, (2) a subtraction from the
book balance, (3) an addition to the bank balance, or (4) a subtraction from the bank
balance.
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