2 violates the principle of establishing

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2. Violates the principle of establishing responsibility . Only Jeff should have access to the petty cash fund since he is the custodian. The company should implement a policy of not allowing petty cash transactions over the lunch hour. Alternatively, Jose could also serve as a petty cash custodian with his own petty cash fund. 3. Violates the proper application of technological controls . While the daily backup is a very good internal control, the tape needs to be taken off the premises every night. If the building and computer are destroyed, the data then can be restored from the tape since it is safely kept off the premises. The company should implement a policy of storing tapes off the premises nightly. 4. Violates regular and independent review . Barto Sayles needs to implement a way to regularly and independently review his employees. Hiring of internal auditors or an outside consultant to objectively review the internal controls and the employees’ work needs to be implemented. 5. Violates the insuring of assets and the bonding of key employees . We do not have enough information to know if the company can afford the move to the higher deductible on the property insurance. However, we can say that dropping the insurance for bonding the employees weakens internal control. If the company does need to engage in cost cutting they should do it without compromising their internal controls. The insurance for the bonding of employees (or at least key employees and those in sensitive positions) should be reinstated. 8-16
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Chapter 08 - Cash and Internal Controls Problem 8-2A (20 minutes) Part 1 May 1 Petty Cash ............................................................. 250.00 Cash ................................................................. 250.00 To establish the petty cash fund. May 15 Janitorial Expenses .............................................. 78.00 Miscellaneous Expenses ...................................... 63.68 Postage Expenses ................................................ 43.50 Advertising Expense ............................................. 57.15 Cash Over and Short ...................................... 3.48 Cash ................................................................. 238.85 To reimburse the petty cash fund. May 16 Petty Cash ............................................................. 200.00 Cash ................................................................. 200.00 To increase the petty cash fund. May 31 Postage Expenses ................................................ 48.36 Mileage Expense ................................................... 38.50 Delivery Expense .................................................. 39.75 Cash Over and Short ............................................ 30.00 Cash ................................................................. 156.61 To reimburse the petty cash fund. Cash ....................................................................... 50.00 Petty Cash ....................................................... 50.00 To decrease the petty cash fund. Instructor note : The two entries on May 31 can be combined into one entry for that date. Part 2 If the May 31 replenishment is not made and no entry is recorded, then several expenses would not be recognized and both net income and equity would be overstated by $156.61 ($48.36 + $38.50 + $39.75 + $30.00). Also, the petty cash asset and total assets would be overstated by $156.61. 8-17
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Chapter 08 - Cash and Internal Controls Problem 8-3A (30 minutes) Part 1 Feb. 2 Petty Cash ...................................................... 300 Cash .......................................................... 300 To establish the petty cash fund. Part 2 Shelton Gallery Petty Cash Payments Report Delivery expense Feb. 23 Delivery of customer's merchandise ......... $ 18.00 Mileage expense Feb. 14 Reimbursement for mileage ....................... 58.00 Postage expense Feb. 12 Express delivery of contract ....................... $ 9.95 Feb. 27 Purchased postage stamps ........................ 64.00 73.95 Merchandise inventory (transportation-in)* Feb. 9 COD charges on purchases ........................ 22.50 Feb. 25 COD charges on purchases ........................ 15.10 37.60 Office supplies expense Feb. 5 Purchased paper for copier ........................ 10.13 Feb. 20 Purchased stationery .................................. 77.76 87.89 Total $275.44 * Transportation-in costs are included in Merchandise Inventory under a perpetual system.
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