Cory Magnum has been working for Matrix Products Inc. for five years and has gained the respect of his peers for his exemplary behaviour and work ethic. His job includes receiving cash and cheques from customers, depositing the cash receipts in the company’s account at the local bank, and recording the transactions in the company’s computerized accounting program. Cory was faced with personal financial problems and decided to make use of $ 2,000 of the company’s available cash to solve them. He planned to return the money as soon as his financial situation improved. The $ 2,000 he took was part of the total cash sales to customers during the previous two business days. At the same time, Cory had received a cheque for $ 2,000 from PLC Ltd. as a partial payment on its trade receivables. To hide his theft, Cory deposited the cheque instead of the cash into the company’s bank account and made the following journal entry:
Cash in bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
In addition, he recorded the following journal entry to credit the account of PLC Ltd. to avoid any questions from that company in the future:
Sales returns and allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Trade receivables— PLC Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Required:
1. Assume that Matrix Products prepares financial statements on a monthly basis. Would any items on the statement of earnings or the statement of financial position be incorrect? Explain.
2. Identify the weaknesses that exist in the company’s internal control system. What changes should be made to strengthen internal control over cash receipts?