May 6, 2013
Financial Accounting: Tools for Business Decision E-Text
Chapter 7: Exercise E7-2
Culotti’s Pizza operates strictly on a carryout basis. Customers pick up their orders at a counter where a clerk exchanges the pizza for cash. While at the counter, the customer can see other employees making the pizzas and the large ovens in which the pizzas are baked Instructions: Identify the six principles of internal control and give an example of each principle that you might observe when picking up your pizza. (Note: It may not be possible to observe all the principles.) 1st Principle – Establishment of responsibility
* Only one person is responsible for a given task.
* For example, the cashier that exchanges the pizza for cash would be the principle of establishment of responsibility. 2nd Principle – Segregation of duties
* Accounting employees balances books
* Another personnel has custody of cash on hand (making deposits) * In this principle- segregation of duties one cannot observe this principle in this scenario. 4th Principle – Documentation procedures
* Pre-number documents or invoices
* For example, the cashier has pre-number receipts for each order that is picked up by the customer. At the end of the clerk’s shift these invoices are forwarded to accounting to timely record each transaction. 5th Principle – Physical mechanical and electronic controls * Consist of having safes, deposit boxes, and time clocks for time worked. * The clerk has a cashier that controls and safeguards the assets to enhance the accuracy and reliability of the accounting records. 6th Principle – Independent internal verification
* Employees review, compare, and reconcile data that was prepared by them. * Three measure are recommended:
* An example cannot be provided for this principle because a customer cannot identify if: * 1st – Org. should verify records periodically or on a surprise basis. * 2nd – A manager should make the verification of an employee * 3rd – Discrepancies and exceptions should be reported to mgt. to make appropriate corrective action. Chapter 7: Problem Set B: P7-2B
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: A) Indicate the weaknesses in internal accounting control in the handling of collections. There are a few weaknesses in internal control in the handling of collections for the church, such as there is no supervision when the ushers take money. There is a chance that the ushers can take money from the collection plate. In addition, the financial secretary manages three tasks like bank reconciliation, has control and has custody of the cash, and maintains the church records. Moreover, the financial secretary holds out cash ($150-$200) per week; different withhold amounts for cash expenditures. There is not a witness when the head usher or the financial secretary count the money. Last, checks are made payable to cash (Kimmel, Weygandt & Kieso, 2007). B) List the improvements in internal control procedures that you plan to make at the next meeting of the audit team for: Ushers: How churches handle usher operations varies from congregation to congregation, but a consistent set of controls protects the fiduciary integrity of the church, and creates confidence among donors. One problem in the collection process is that only the head usher counts the collection without any accountability to ensure his count is accurate, or that all of the funds donated are transferred to the safe. This can be resolved by having the other ushers...