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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Evaluating internal control of cash

The following procedures were recently installed by The China Shop:

  1. a. All sales are rung up on the cash register, and a receipt is given to the customer. All sales are recorded on a record locked inside the cash register.
  2. b. Each cashier is assigned a separate cash register drawer to which no other cashier has access.
  3. c. At the end of a shift, each cashier counts the cash in his or her cash register, unlocks the cash register record, and compares the amount of cash with the amount on the record to determine cash shortages and overages.
  4. d. Checks received through the mail are given daily to the accounts receivable clerk for recording collections on account and for depositing in the bank.
  5. e. Vouchers and all supporting documents are perforated with a PAID designation after being paid by the treasurer.
  6. f. Disbursements are made from the petty cash fund only after a petty cash receipt has been completed and signed by the payee.
  7. g. The bank reconciliation is prepared by the cashier.

Instructions

Indicate whether each of the procedures of internal control over cash represents (1) a strength or (2) a weakness. For each weakness, indicate why it exists.

To determine

Internal control: Internal control is a process which ensures continuous reliability of accomplishment of a company’s objectives, related to operations, financial reporting, and in conformity with laws and regulations.

The following are the internal control principles:

  • Authorizing the responsibility
  • Segregation of duties
  • Documenting and recording transactions
  • Physical controls
  • Periodic independent verification
  • Human resource controls

To indicate:

  1. (1) Whether procedures of internal control over cash represents strength.
  2. (2) Whether procedures of internal control over cash represents weakness.
Explanation

(1)

The internal control procedures a, b, e, and f are the strengths over the cash.

(2)

The following are the weakness in the internal control procedures over the cash:

(c)   Cashier counts the cash in the cash register, unlocks cash register record, and makes comparison of the cash amount with the recorded amount to find out cash shortages and overages. This is a weakness. Here, duties need to be segregate. An independent person should count the cash available in cashier’s cash register, unlock the record and make comparison between the available cash and the recorded amount...

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