Janet Black, the owner of Janet’s Catering, has delegated the management of the business to Danielle Vale, a friend. Black drops by to meet customers and check up on cash receipts, but Vale buys the merchandise and handles cash payments. Business has been very good lately, and cash receipts have kept pace with the apparent level of sales. However, for a year or so, the amount of cash on hand has been too low. When asked about this, Vale explains that suppliers are charging more for goods than in the past. During the past year, Vale has taken two expensive vacations, and Black wonders how Vale can afford these trips on her $52,000 annual salary and commissions.

List at least three ways Vale could be defrauding Black of cash. In each instance, also identify how Black can determine whether Vale’s actions are ethical. Limit your answers to the store’s cash payments. The business pays all suppliers by check (no EFTs).

The situation below reveals an internal control weakness:

• Pam Silk owns an architectural firm. Silk’s staff consists of 19 professional architects, and Silk manages the office. Often, her work requires her to travel to meet with clients. During the past six months, Silk has observed that when she returns from a business trip, the architecture jobs in the office have not progressed satisfactorily. She learns that when she is away, two of her senior architects take over office management and neglect their normal duties. One employee could manage the office.

Requirements

1. Identify the missing internal control characteristic in each situation.

2. Identify each organization’s possible problem.

3. Propose a solution to the problem.

The situation below reveals an internal control weakness:

• A purchasing agent for Sampson Manufacturing is responsible for buying diamonds for use in the company’s manufacturing process, approving the invoices for payment, and signing the checks. No supervisor reviews the purchasing agent’s work.

Requirements

1. Identify the missing internal control characteristic in each situation.

2. Identify each organization’s possible problem.

3. Propose a solution to the problem.

The situation below reveals an internal control weakness:

• Tom Dickens has been an employee of the city of Fulton for many years. Because the city is small, Dickens performs all of its accounting duties, in addition to opening the mail and preparing bank deposits and bank reconciliations.

Requirements

1. Identify the missing internal control characteristic in each situation.

2. Identify each organization’s possible problem.

3. Propose a solution to the problem.

Parisian Imports buys furniture and décor items from France and sells them to retailers. Erin Moreland is the general manager of the company. Moreland employs two other people in the business. Nadine Mast serves as the buyer for the company. Mast travels throughout France to find interesting new products. When Mast finds a new product, she arranges for Parisian Imports to purchase and pay for the item. She helps the artisans prepare their invoices and then faxes the invoices to Moreland in the company office.

Moreland operates out of an office in Brooklyn, New York. The office is managed by Sandy Richter, who handles the mail, keeps the accounting records, makes bank deposits, and prepares the monthly bank reconciliation. Virtually all of the company’s cash receipts arrive by mail—from sales made to Target, Crate and Barrel, and Williams-Sonoma.

Richter also prepares checks for payment based on invoices that come in from the suppliers that have been contacted by Mast. To maintain control over cash payments, Moreland examines the paperwork and signs all checks.

Requirement

Identify all the major internal control weaknesses in Parisian Imports’ system and explain how they could hurt the company. Also state how to correct each weakness.

The cash data of Duffy Automotive for May 2018 follow:

$$\begin{array}{rccccr} \textbf{Cash} &&&&& \textbf{Account No. 101}\\ \textbf{Date} & \textbf{Item} & \textbf{Jrnl. Ref.} & \textbf{Debit} & \textbf{Credit} & \textbf{Balance}\\ \\ \text{May 1} & \text{Balance} &&&&7,150\\ 30 && \text{CR6} & 9,751 && 16,901\\ 30 && \text{CP11} &&10,308 & 6,593\\ \end{array}$$

$$\begin{array}{l} \textbf{Cash Receipts (CR) \hspace{5pt}Cash Payments (CP)}\\ \end{array}$$

$$\begin{array}{rrcr} \textbf{Date} & \textbf{Cash Debit} & \textbf{Check No.} & \textbf{Cash Credit}\\ \\ \text{May 2} & \$2,728 & 3113 & \$\hspace{5pt}1,522\\ 8 & 512 & 3114 & 1,759\\ 10 & 1,693 & 3115 & 1,930\\ 16 & 832 & 3116 & 63\\ 22 & 427 & 3117 & 805\\ 29 & 982 & 3118 & 87\\ 30 & \underline{2,577} & 3119 & 476\\ \text{Total} & \underline{\underline{\$9,751}} &3120 & 1,049\\ && 3121 & 257\\ && 3122 & \underline{2,360}\\ && \text{Total} & \underline{\underline{\$10,308}}\\ \end{array}$$

$$\begin{array}{c} \textbf{Bank Statement for May 2018}\\ \end{array}$$

$$\begin{array}{lrlr} \text{Beginning balance} &&& \$7,150\\ \text{Deposits and other additions:}\\ \text{May 1} & \$\hspace{8pt}700 & \text{EFT}\\ \text{May 4} &2,728\\ \text{May 9} & 512\\ \text{May 12} & 1,693\\ \text{May 17} & 832\\ \text{May 22} & 427\\ \text{May 23} & \underline{1,325} & \underline{\text{BC}} & 8,217\\ \text{Checks and other deductions:}\\ \text{May 7} & \$1,522\\ \text{May 13} & 1,390\\ \text{May 14} & 492 & \text{US}\\ \text{May 15} & 1,759\\ \text{May 18} & 63\\ \text{May 21} & 316 & \text{EFT}\\ \text{May 26} & 805\\ \text{May 30} & 87\\ \text{May 30} & \underline{10} & \underline{\text{SC}} & \underline{(6,444)}\\ \text{Ending balance} &&& \underline{\underline{\$8,923}}\\ \end{array}$$

Explanation: BC—bank collection of note receivable from customer, EFT—electronic funds transfer, US—unauthorized signature, SC—service charge

Additional data for the bank reconciliation include the following:

a. The EFT deposit was a receipt of monthly rent. The EFT debit was a monthly insurance payment.

b. The unauthorized signature check was received from a customer and returned by the bank unpaid.

c. The correct amount of check number 3115, a payment on account, is $1,390. (Duffy Automotive’s accountant mistakenly recorded the check as$1,930.)

Requirement

Describe how a bank account and the bank reconciliation help the general manager control Duffy Automotive’s cash.

The cash data of Duffy Automotive for May 2018 follow:

$$\begin{array}{rccccr} \textbf{Cash} &&&&& \textbf{Account No. 101}\\ \textbf{Date} & \textbf{Item} & \textbf{Jrnl. Ref.} & \textbf{Debit} & \textbf{Credit} & \textbf{Balance}\\ \\ \text{May 1} & \text{Balance} &&&&7,150\\ 30 && \text{CR6} & 9,751 && 16,901\\ 30 && \text{CP11} &&10,308 & 6,593\\ \end{array}$$

$$\begin{array}{l} \textbf{Cash Receipts (CR) \hspace{5pt}Cash Payments (CP)}\\ \end{array}$$

$$\begin{array}{rrcr} \textbf{Date} & \textbf{Cash Debit} & \textbf{Check No.} & \textbf{Cash Credit}\\ \\ \text{May 2} & \$2,728 & 3113 & \$\hspace{5pt}1,522\\ 8 & 512 & 3114 & 1,759\\ 10 & 1,693 & 3115 & 1,930\\ 16 & 832 & 3116 & 63\\ 22 & 427 & 3117 & 805\\ 29 & 982 & 3118 & 87\\ 30 & \underline{2,577} & 3119 & 476\\ \text{Total} & \underline{\underline{\$9,751}} &3120 & 1,049\\ && 3121 & 257\\ && 3122 & \underline{2,360}\\ && \text{Total} & \underline{\underline{\$10,308}}\\ \end{array}$$

$$\begin{array}{c} \textbf{Bank Statement for May 2018}\\ \end{array}$$

$$\begin{array}{lrlr} \text{Beginning balance} &&& \$7,150\\ \text{Deposits and other additions:}\\ \text{May 1} & \$\hspace{8pt}700 & \text{EFT}\\ \text{May 4} &2,728\\ \text{May 9} & 512\\ \text{May 12} & 1,693\\ \text{May 17} & 832\\ \text{May 22} & 427\\ \text{May 23} & \underline{1,325} & \underline{\text{BC}} & 8,217\\ \text{Checks and other deductions:}\\ \text{May 7} & \$1,522\\ \text{May 13} & 1,390\\ \text{May 14} & 492 & \text{US}\\ \text{May 15} & 1,759\\ \text{May 18} & 63\\ \text{May 21} & 316 & \text{EFT}\\ \text{May 26} & 805\\ \text{May 30} & 87\\ \text{May 30} & \underline{10} & \underline{\text{SC}} & \underline{(6,444)}\\ \text{Ending balance} &&& \underline{\underline{\$8,923}}\\ \end{array}$$

Explanation: BC—bank collection of note receivable from customer, EFT—electronic funds transfer, US—unauthorized signature, SC—service charge

Additional data for the bank reconciliation include the following:

a. The EFT deposit was a receipt of monthly rent. The EFT debit was a monthly insurance payment.

b. The unauthorized signature check was received from a customer and returned by the bank unpaid.

c. The correct amount of check number 3115, a payment on account, is $1,390. (Duffy Automotive’s accountant mistakenly recorded the check as$1,930.)

Requirement

Prepare the journal entries required at May 31, 2018.

The cash data of Duffy Automotive for May 2018 follow:

$$\begin{array}{rccccr} \textbf{Cash} &&&&& \textbf{Account No. 101}\\ \textbf{Date} & \textbf{Item} & \textbf{Jrnl. Ref.} & \textbf{Debit} & \textbf{Credit} & \textbf{Balance}\\ \\ \text{May 1} & \text{Balance} &&&&7,150\\ 30 && \text{CR6} & 9,751 && 16,901\\ 30 && \text{CP11} &&10,308 & 6,593\\ \end{array}$$

$$\begin{array}{l} \textbf{Cash Receipts (CR) \hspace{5pt}Cash Payments (CP)}\\ \end{array}$$

$$\begin{array}{rrcr} \textbf{Date} & \textbf{Cash Debit} & \textbf{Check No.} & \textbf{Cash Credit}\\ \\ \text{May 2} & \$2,728 & 3113 & \$\hspace{5pt}1,522\\ 8 & 512 & 3114 & 1,759\\ 10 & 1,693 & 3115 & 1,930\\ 16 & 832 & 3116 & 63\\ 22 & 427 & 3117 & 805\\ 29 & 982 & 3118 & 87\\ 30 & \underline{2,577} & 3119 & 476\\ \text{Total} & \underline{\underline{\$9,751}} &3120 & 1,049\\ && 3121 & 257\\ && 3122 & \underline{2,360}\\ && \text{Total} & \underline{\underline{\$10,308}}\\ \end{array}$$

$$\begin{array}{c} \textbf{Bank Statement for May 2018}\\ \end{array}$$

$$\begin{array}{lrlr} \text{Beginning balance} &&& \$7,150\\ \text{Deposits and other additions:}\\ \text{May 1} & \$\hspace{8pt}700 & \text{EFT}\\ \text{May 4} &2,728\\ \text{May 9} & 512\\ \text{May 12} & 1,693\\ \text{May 17} & 832\\ \text{May 22} & 427\\ \text{May 23} & \underline{1,325} & \underline{\text{BC}} & 8,217\\ \text{Checks and other deductions:}\\ \text{May 7} & \$1,522\\ \text{May 13} & 1,390\\ \text{May 14} & 492 & \text{US}\\ \text{May 15} & 1,759\\ \text{May 18} & 63\\ \text{May 21} & 316 & \text{EFT}\\ \text{May 26} & 805\\ \text{May 30} & 87\\ \text{May 30} & \underline{10} & \underline{\text{SC}} & \underline{(6,444)}\\ \text{Ending balance} &&& \underline{\underline{\$8,923}}\\ \end{array}$$

Explanation: BC—bank collection of note receivable from customer, EFT—electronic funds transfer, US—unauthorized signature, SC—service charge

Additional data for the bank reconciliation include the following:

a. The EFT deposit was a receipt of monthly rent. The EFT debit was a monthly insurance payment.

b. The unauthorized signature check was received from a customer and returned by the bank unpaid.

c. The correct amount of check number 3115, a payment on account, is $1,390. (Duffy Automotive’s accountant mistakenly recorded the check as$1,930.)

Requirement

Prepare Duffy Automotive’s bank reconciliation at May 31, 2018.

Which of the following assets are not included in “cash equivalents” in a typical balance sheet?

a. Foreign government securities b. Certain very low-risk equity securities c. U.S. government securities d. Time deposits e. All of the above might be included in “cash equivalents.”

Mark Kershey, a former Smucker employee, was charged with defrauding the J.M. Smucker Company of more than $4.1 million over a 16-year period. Charges were filed in October 2014. In 2015, Kershey was sentenced to nearly five years in prison. Kershey was the chief airplane mechanic at the company’s hangar at the Akron-Canton Airport in Ohio from 1990 until he was discharged by Smucker in 2013. From 1997 until the time he left Smucker, Kershey invoiced Smucker for more than$4.1 million by using a fictitious entity he created. He billed Smucker for nonexistent parts and/or work that he himself actually performed as part of his duties as a salaried employee. Most of these invoices were for less than $10,000, which Kershey himself was authorized to approve. A supervisor to Kershey approved the few invoices that were for more than$10,000 based on his trust in Kershey. To carry out his false billing scheme, Kershey set up a post office box in Lake Township, Ohio, using the fictitious entity name of Aircraft Parts Services Co. (APS). He (as APS) would then invoice Smucker using nonsequential invoice numbers, so it looked like APS was invoicing other companies too. Kershey used the proceeds to purchase and maintain two planes and several automobiles, and to make payments on his house.

Kershey was eventually caught in late 2012 when three checks written by Smucker to APS totaling $44,000 were not cashed. When a Smucker employee questioned Kershey about the uncashed checks, Kershey indicated that APS had been sold to another Smucker vendor. The false billing scheme began to unravel and Kershey was fired.

Requirements

1. What internal controls could have been used to prevent Kershey from carrying out the false billing scheme?
2. What factors might have contributed to the weak internal control environment that allowed this scheme to exist for 16 years?

Explain why separation of duties is often described as the cornerstone of internal control for safeguarding assets. Describe what can happen if the same person has custody of an asset and also accounts for the asset.

Which of the following is an example of poor internal control in an organization?

a. The company rotates employees through various jobs. b. The accounting department compares goods received with the related purchase order. c. The mailroom clerk records daily cash receipts in the journal. d. Employees must take vacations.

Identify all the major internal control weaknesses in Italian Imports’ system and explain how they could hurt the company. Also state how to correct each weakness.

Each of the following situations reveals an internal control weakness:

c. Bailey Price owns an architectural firm. Price’s staff consists of 16 professional architects, and Price manages the office. Often her work requires her to travel to meet with clients. During the past six months, Price has observed that when she returns from a business trip, the architecture jobs in the office have not progressed satisfactorily. She learns that when she is away, two of her senior architects take over office management and neglect their normal duties. One employee could manage the office.

Before paying an invoice for goods received on account, the controller or treasurer should ensure that

a. the company is paying for the goods it actually received. b. the company is paying for the goods it ordered. c. the company has not already paid this invoice. d. all of the above.