1.
(the receiving clerk) are separated from recordkeeping (the accounting
with the existing assets at reasonable intervals. The comparison of the cash regis-
compared with the invoices before payment is authorized. In addition, prior to pay-
ment, the invoice should be approved by the person who submitted the purchase
requisition to ensure that he or she actually received the quantity and quality of
goods requested. In this way, authorization (the purchasing agent) and custody
ter tape with the cash in the cash drawer at the end of each day accomplishes this
person who has custody of the assets. In this case, the sales clerk could misappro-
priate funds from the cash drawer and report the sales at less than actual.
Cash sales One objective of internal control is to compare the records of assets
objective. However, the comparison should be made by someone other than the
Purchases In this case, invoices are being paid before they are compared with the
purchase order and receiving report. An invoice could be paid for goods that have
department).
P8. Internal Control Activities
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1.
2.
Note and interest collected by bank
Interest on average bank account
balance
To correct check recorded
incorrectly in check register
$2,420 – $2,024 = $396
Bank service charge for April
NSF check of Hasan Ali returned
by bank
April 30, 2014
2014
Delta Company
Bank Reconciliation
P9. Bank Reconciliation
8-17
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4.
records of the company and proves that all cash transactions have been recorded.
as notes receivable collected by bank, interest income on notes, interest income,
overstatement of deposits, collection fees, NSF checks, and service charges, which
A bank reconciliation is a necessary internal control because events and items such
P9. Bank Reconciliation (Concluded)
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1.
2.
To replenish the petty cash fund
A semiprofessional baseball team might use an imprest system as a fund for
2014
P10. Imprest (Petty Cash) Fund Transactions
8-19
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1.
2.
Both the cashier and the ticket taker would be caught. At the end of the perform-
C1. Conceptual Understanding: Control Systems
Recording transactions Accountability is established at the point of receiving
Authorization Three key points of authorization have been put into the new sys-
Cases
8-20
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a.
b.
c.
d.
1.
2.
3.
4.
C2. Interpreting Financial Reports: Internal Control Lapse
The control activities that were likely violated in this case are as follows.
Authorization: These expenditures were probably not authorized by a person who
No set solution. Note to Instructor: This case introduces students to the different types of
Periodic independent verification: There was apparently no independent verification
Separation of duties: It is likely that these expenditures were authorized by the em-
Sound personnel procedures: It is likely that sound personnel policies such as rotation
conceal the fraud.
of jobs, required vacations, and bonding were violated and enabled the employee to
C3. Conceptual Understanding: Internal Controls
C4. Annual Report Case: Internal Control Responsibilities
Management states, “We are responsible for establishing and maintaining adequate
The auditor states, “Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become in-
control over financial reporting is effective and provides reasonable assurance that
2011, based on COSO criteria.”
assets are safeguarded and that the financial records are reliable for preparing finan-
cial statements as of December 31, 2011.”
The auditor states, “In our opinion, CVS Caremark Corporation maintained in all ma-
Management states, “Based on our assessment, we conclude our Company’s internal
terial respects effective internal control over financial reporting as of December 31,
the policies or procedures may deteriorate.”
internal control over financial reporting.”
8-21
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quired for the customer to board the plane.
This case presents a situation that many students may be in a position to experience.
CVS and Southwest have different control risks. CVS is concerned that customers will
C5. Comparison Analysis: Contrasting Internal Control Needs
C6. Ethical Dilemma: Personal Responsibility for Mistakes
Note to Instructor: Answers will vary depending on the company selected by the
C7. Continuing Case: Annual Report Project
8-22
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