Julie Brown, the owner of Julie’s Party Sandwiches, has delegated management of the business to Stacie Wood, a friend. Brown drops by to meet customers and check up on cash receipts, but Wood 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, Wood explains that suppliers are charging more for goods than in the past. During the past year, Wood has taken two expensive vacations, and Brown wonders how Wood can aford these trips on her $52,000 annual salary and commissions.

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

Each of the following situations reveals an internal control weakness:

Situation a. In evaluating the internal control over cash payments of Arlington Manufacturing, an auditor learns that the purchasing agent is responsible for purchasing 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.

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

Situation c. Ron Lucas has been an employee of the city of Scandia for many years. Because the city is small, Lucas performs all accounting duties, in addition to opening the mail, preparing the bank deposit, and preparing the bank reconciliation.

Requirements

1. Identify the missing internal control characteristic in each situation.\
2. Identify each firm’s possible problem.\
3. Propose a solution to the problem.

Swedish Imports is an importer of silver, brass, and furniture items from Sweden. Sandra Gustafson is the general manager of Swedish Imports. Gustafson employs two other people in the business. Mandy Martin serves as the buyer for Swedish Imports. In her work, Martin travels throughout Sweden to find interesting new products. When Martin finds a new product, she arranges for Swedish Imports to purchase and pay for the item. She helps the artisans prepare their invoices and then faxes the invoices to Gustafson in the company ofce.

Gustafson operates out of an ofce in Brooklyn, New York. The ofce is managed by Sandra Moore, who handles the mail, keeps the accounting records, makes bank deposits, and prepares the monthly bank reconciliation. Virtually all of Swedish Imports’ cash receipts arrive by mail-from sales made to Target, Crate and Barrel, and Williams-Sonoma.

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

1. Identify all the major internal control weaknesses in Swedish Imports’ system and how the resulting action could hurt Swedish Imports. Also state how to correct each weakness.

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.

Julia Beecher, chief financial ofcer of Keller Wireless, is responsible for the company’s budgeting process. Beecher’s staf is preparing the Keller Wireless cash budget for 2017. A key input to the budgeting process is last year’s statement of cash flows, which follows (amounts in thousands):

$$\begin{array}{lr} \textbf{Cash Flows from Operating Activities}\\ \text{Collections from customers}&\$66,000\\ \text{Interest received}&600\\ \text{Cash payments for inventory}&(45,000)\\ \text{Cash payments for operating expenses}&(13,600)\\ \text{Net cash provided by operating activities}&8,000\\ \textbf{Cash Flows from Investing Activities}\\ \text{Purchases of equipment}&(4,600)\\ \text{Purchases of investments}&(200)\\ \text{Sales of investments}&900\\ \text{Net cash used for investing activities}&(3,900)\\ \textbf{Cash Flows from Financing Activities}\\ \text{Payment of long-term debt}&(400)\\ \text{Issuance of stock}&1,400\\ \text{Payment of cash dividends}&(300)\\ \text{Net cash provided by financing activities}&700\\ \textbf{Cash}\\ \text{Increase (decrease) in Cash}&4,800\\ \text{Cash, beginning of year}&3,300\\ \text{Cash, end of year}&\$8,100\\ \end{array}$$

1. Prepare the Keller Wireless cash budget for 2017. Date the budget simply “2017,” and denote the beginning and ending cash balances as “beginning” and “ending.” Assume the company expects 2017 to be the same as 2016, but with the following changes:

a. In 2017, the company expects a 14% increase in collections from customers and a 20% increase in cash payments for inventory.
b. There will be no sales of investments in 2017.
c. Keller Wireless plans to issue no stock in 2017.
d. Keller Wireless plans to end the year with a cash balance of $3,500 (thousand).

The cash data of Dunlap Automotive for June 2016 follow:

$$\begin{array}{r|c|c|c|c|c} \hline\text { Cash } \\ \hline \text { Date } & \text { Item } & \text { Jrnl. Ref. } & \text { Debit } & \text { Credit } & \text { Balance } \\ \hline \text { June 1 } & \text { Balance } & & & & 7,450 \\ 30 & & \text { CR6 } & 9,478 & & 16,928 \\ 30 & & \text { CP11 } & & 10,397 & 6,531 \\ \hline \end{array}$$

$$\begin{array}{rrcr} \hline\text{Date}&\text{Cash debit}&\text{Check No.}&\text{Cash Credit}\\\hline \text { June } 2 & \$ 2,930 & 3113 & \$ 1,509 \\ 8 & 532 & 3114 & 1,869 \\ 10 & 1,696 & 3115 & 1,830 \\ 16 & 837 & 3116 & 87 \\ 22 & 355 & 3117 & 871 \\ 29 & 885 & 3118 & 149 \\ 30 & 2,243 & 3119 & 453 \\ \text { Total } & \underline{\$ 9,478} & 3120 & 1,013 \\ & & 3121 & 208 \\ & & 3122 & 2,408 \\ &&\text{Total}&\$10,397\\ \hline \end{array}$$

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 $1,380. (Dunlap Automotive’s accountant mistakenly recorded the check as$1,830.)

1. Prepare the Dunlap Automotive bank reconciliation at June 30, 2016.

2. Prepare the journal entries required at June 30, 2016.

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

What is the process of allocating the cost of natural resources to expense as they are applied?

Each of the following situations reveals an internal control weakness:

a. In evaluating the internal control over cash payments of Judd Manufacturing, an auditor learns that the purchasing agent is responsible for purchasing 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.

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

c. Ian Holt has been an employee of the city of Streetsboro for many years. Because the city is small, Holt performs all accounting duties, in addition to opening the mail, preparing the bank deposit, and preparing the bank reconciliation.

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

2. Identify each firm’s possible problem.

3. Propose a solution to the problem.

Irish Imports is an importer of silver, brass, and furniture items from Ireland. Patricia O’Malley is the general manager of Irish Imports. O’Malley employs two other people in the business. Maureen Kennedy serves as the buyer for Irish Imports. In her work, Kennedy travels throughout Ireland to find interesting new products. When Kennedy finds a new product, she arranges for Irish Imports to purchase and pay for the item. She helps the artisans prepare their invoices and then faxes the invoices to O’Malley in the company ofce.

O’Malley operates out of an ofce in Boston, Massachusetts. The ofce is managed by Lesley Luck, who handles the mail, keeps the accounting records, makes bank deposits, and prepares the monthly bank reconciliation. Virtually all of Irish Imports’ cash receipts arrive by mail—from sales made to Target, Pier 1 Imports, and specialty shops.

Luck also prepares checks for payment based on invoices that come in from the suppliers who have been contacted by Kennedy. To maintain control over cash payments, O’Malley examines the paperwork and signs all checks.

1. Identify all the major internal control weaknesses in Irish Imports’ system and how the resulting action could hurt Irish Imports. Also state how to correct each weakness.

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

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

Jubilee’s Bakery is budgeting cash for 2017. The cash balance at December 31, 2016, was $6,000. Jubilee’s Bakery budgets 2017 cash receipts at$81,000. Estimated cash payments include $44,000 for inventory,$34,000 for operating expenses, and $15,000 to expand the store. Jubilee’s Bakery needs a minimum cash balance of$13,000 at all times. Jubilee’s Bakery expects to earn net income of $76,000 during 2017. What is the final result of the company’s cash budget for 2017?

a. Must arrange new financing for$19,000.
b. Pay of $38,000 of debt.
c. There is$38,000 available for additional investments.
d. There is $19,000 available for additional investments.

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

Test your understanding of internal control and cash by answering the following questions. Answer each question by selecting the best choice from among the answers given. In a bank reconciliation, interest revenue earned on your bank balance is a. deducted from the book balance. b. added to the bank balance. c. added to the book balance. d. deducted from the bank balance.

Test your understanding of internal control and cash by answering the following questions. Answer each question by selecting the best choice from among the answers given. If a bank reconciliation included a deposit in transit of $790, the entry to record this reconciling item would include a a. credit to prepaid insurance for$790. b. debit to cash for $790. c. credit to cash for$790. d. no entry is required.