Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 7 Sarbanes-Oxley, Internal Control, and Cash 351

On July 3, the cashier resigned, effective at the end of the month. Before leaving on July 31,

the cashier prepared the following bank reconciliation:

Cash balance per books, July 31 $ 9,806.05

Add outstanding checks:

No. 1996 $127.40

1997 520.00

1999 851.50 1,198.90

$11,004.95

Less undeposited receipts 5,000.00

Cash balance per bank, July 31 $ 6,004.95

Deduct unrecorded note with interest 4,240.00

True cash, July 31 $ 1,764.95

Calculator Tape of Outstanding Checks:

0.00*

127.40

520.00

851.50

1,198.90*

Subsequently, the owner of Lumberjack Company discovered that the cashier had stolen an

unknown amount of undeposited receipts, leaving only $5,000 to be deposited on July 31. The

owner, a close family friend, has asked your help in determining the amount that the former

cashier has stolen.

1. Determine the amount the cashier stole from Lumberjack Company. Show your computa-
   tions in good form.


2. How did the cashier attempt to conceal the theft?


3. a. Identify two major weaknesses in internal controls which allowed the cashier to steal
   the undeposited cash receipts.
   b. Recommend improvements in internal controls, so that similar types of thefts of unde-
   posited cash receipts can be prevented.

Select a business in your community and observe its internal controls over cash receipts and cash

payments. The business could be a bank or a bookstore, restaurant, department store, or other

retailer. In groups of three or four, identify and discuss the similarities and differences in each

business’s cash internal controls.

Assume that you have just received a $100,000 check! Go to the Web site of (or visit) a local bank

and collect information about the savings and checking options that are available. Identify the

option that is best for you and why it is best.

Activity 7-8

Observe internal controls over
cash

Activity 7-9

Invest excess cash

ANSWERS TO SELF-STUDY QUESTIONS

1. C Compliance with laws and regulations (answer C)
   is an objective, not an element, of internal control. The
   control environment (answer A), monitoring (answer B),
   control procedures (answer D), risk assessment, and informa-
   tion and communication are the five elements of internal
   control.
   2. A The polices and procedures that are established to
   safeguard assets, ensure accurate business information, and en-
   sure compliance with laws and regulations are called internal
   controls (answer A). The three steps in setting up an account-
   ing system are (1) analysis (answer B), (2) design (answer C),
   and (3) implementation (answer D).