7 - SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 7 EXERCISE...

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Unformatted text preview: SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 7 EXERCISE 7-1A 1. Separation of Duties : Whenever possible, the functions of authorization, recording, and custody should be handled by different individuals. If these duties are separated, the likelihood of theft or fraud by employees is greatly reduced, because collusion among employees is necessary to accomplish the crime. 2. Quality of Employees : Employees should be competent and adequately trained to perform the required task. 3. Bonded Employees : Employers should hire employees with high personal integrity. Employees in positions of trust should be covered with a fidelity bond (insurance against loss from employee dishonesty). 4. Periods of Absence : Employees should be required to take extended vacations and/or be rotated among duties in order to discover patterns of dishonesty or theft. 5. Procedures Manual : A procedures manual should be established, kept up-to-date, and enforced to assure that company procedures for processing transactions are being followed. 6. Authority and Responsibility : A clear chain of command should be established and documented. A manual should detail this chain of command and provide guidance for specific and general authority. 7. Prenumbered Documents : The use of prenumbered documents (checks, receipts, etc.) requires all such documents to be accounted for and reduces the likelihood of unauthorized transactions. 7-7 8. Physical Control : All assets should be properly documented, and periodically accounted for, with access limited to authorized personnel. 9. Performance Evaluations : A periodic and independent evaluation of employees' performance alerts management to inefficiencies of employees. 7-8 EXERCISE 7-2A a. If you are a small business with only two employees, you still need to implement all of the basic procedures that are possible. You need to be especially careful about quality of employees, bonded employees where cash or other easily transferable assets are involved, physical controls (e.g. insurance, locks, on premises safe), prenumbered documents, periods of absence where possible, and separation of duties where possible. b. In a small business, the separation-of-duties control requirement is addressed by involvement of the owner. The owner needs to take a more aggressive role in the management and oversight of the business, especially the handling of cash. The owner should be sure he/she signs and verifies the validity of each check and oversees the cash deposits and receipts. In addition, the owner should receive the bank statement and review it each month....
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This note was uploaded on 04/10/2008 for the course ACCOUNTING 221 taught by Professor West during the Spring '08 term at UMass (Amherst).

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7 - SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 7 EXERCISE...

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