Reflect (5 points)

Answer the questions about internal controls.

1. Why is cross-training of employees important to internal controls? (1 point)

2. How does rotating cross-trained employees reduce the likelihood of fraud within an accounting department? (1 point)

3. How is separation of duties related to internal controls? (1 point)

4. Why is it important to separate accounting from asset control and operations? (1 point)

5. When should permissions be a part of a company's internal control process? (1 point)

Analyze (12 points)

Analyze scenarios related to internal control procedures.

1. Espen Heating and Cooling is a small business, so it has an accounting department of only four people. Rachel is in charge of accounts payable, Ethan does accounts receivable, and Shaniqua takes care of all purchasing decisions. Mitchell, the manager of the accounting department, oversees the activity but spends most of his time working with the rest of the management team instead of his department's employees. He insists that Rachel, Ethan, and Shaniqua perform their individual duties and not interfere with those of their fellow accountants.

a. How does this constitute a violation of an internal control? (2 points)

b. How should this violation be corrected? (2 points)

2. As the employee in charge of accounts receivable, Ethan has a lot of responsibility. Not only does he receive all cash, but he also records the transactions for accounts received. He has often asked Mitchell if this is a good idea, as it seems like a lot of responsibility for one person. Mitchell just reminds him that receiving cash and recording transactions for cash received are both responsibilities of an accounts receivable clerk.

a. How does this constitute a violation of an internal control? (2 points)

b. How should this violation be corrected? (2 points)

3. Even though Shaniqua is in charge of purchasing decisions, as the manager of the department Mitchell approves every decision that Shaniqua makes. Recently, however, Mitchell has been spending less time in the accounting office and more time in the boardroom, and on some days his three subordinates do not even see him. Therefore, instead of approving purchases as they are made, Mitchell sits down once a week and reviews the purchases, giving his approval to a week's worth of purchases at once.

a. How does this constitute a violation of an internal control? (2 points)

b. How should this violation be corrected? (2 points)

Synthesize (23 points)

Explain how to use cash control procedures and how to make and endorse checks.

1. You have recently been consulted by Mr. Hamby, a new business owner, to assist in establishing the business's accounting department. The business specializes in the distribution of farm products, and Mr. Hamby knows much about this subject but understands very little about accounting. However, he does know that fraud is very serious, and it is something that he wants to avoid.

a. Mr. Hamby asks about bank account access. "I have several employees who I trust," he tells you. "I would like to give all of them access to the business bank account, so that any of them can run to the bank and make deposits or withdrawals when I'm too busy to do it. Is that a good idea?" What should you tell him? (3 points)

b. When you mention the term dual control, Mr. Hamby gives you a look of curiosity. "What exactly is that, and what does it have to do with bank account access?" Explain to Mr. Hamby what this means. (2 points)

c. You ask Mr. Hamby how most of his customers pay for their orders. "We're set up to accept credit cards," he replies, "but most of our customers still prefer to pay using checks." You then ask him how long he typically waits before depositing checks. He explains that he always has one of his employees take the checks to the bank for deposit at the end of the day that is, if he doesn't do it himself. If many payments are received throughout the day, he might even make a deposit around lunch as well as after the day is over. What would you say to him about this practice? (3 points)

d. You then ask Mr. Hamby how he typically pays for the company's orders. "I always pay with checks," he replies. "I give each of my employees a check book so that everyone is able to pay with a check when there's something that we need." How should you respond to this statement? (3 points)

2. Nelson, your neighbor's teenage son, has decided to start a lawn care business. He has set up a bank account for his business but is daunted by the number of checks he will need to accept from his customers. He comes to you to ask a few questions.

a. Nelson asks you to describe the parts of a check. You take a check out of your pocket and show it to him. Describe each part of the check that is labeled in the diagram. (4 points)

b. "If I am writing a check for supplies or other things I will need for my business," asks Nelson, "what should I write in each place?" How would you answer this question? (2 points)

c. Nelson explains that he has recently finished his first full week of work and has received a number of checks from his customers, but he has not yet deposited them. You pull out a copy of a deposit slip and explain how to fill it out. What do you tell Nelson? (4 points)

d. Like Mr. Hamby, Nelson is concerned about fraud. But while Mr. Hamby has over two decades experience in the business world, Nelson's still in his first week. What would you tell Nelson about controlling cash when it is in the form of checks? (2 points)