Question

BYP7.6 Natalie is struggling to keep up with the recording of her accounting transactions. She is spending a lot of time marketing and selling smoothies and juicers. Her friend John is an accounting student who runs his own accounting service. He has asked Natalie if she would like to have him do her accounting. John and Natalie meet and discuss her business. John suggests that he could perform the following procedures for Natalie: 1. Take the deposits to the bank every Friday. All cheques and cash received would be kept in a locked box at Natalie's house. 2. Write and sign all of the cheques. He would review the invoices and send out cheques as soon as the invoices are received. 3. Record all of the deposits in the accounting records. 4. Record all of the cheques in the accounting records. 5. Prepare the monthly bank reconciliation. 6. Transfer Natalie's manual accounting records to his computer accounting program. John maintains the accounting information that he keeps for his clients on his laptop computer. 7. Prepare monthly financial statements for Natalie to review. 8. Write himself a cheque every month for the work he has done for Natalie. Instructions a. Identify the weaknesses in internal control that you see in the system John is recommending. Can you suggest any improvements if Natalie hires John to do the accounting? b. Natalie would like you to help her. She asks you to prepare a bank reconciliation for October 31, 2021, and any necessary journal entries using the following information. GENERAL LEDGER-Santé Smoothies Cash Date Explanation Ref Debit Credit Balance 2021 Oct. 1 Balance 2,657 750 3,407 3 Cheque #600 625 2,782 3 Cheque #601 95 2,687 8 Cheque #602 56 2,631 9 1,050 13 Cheque #603 425 3,256 20 155 3,411 28 Cheque #604 297 3,114 28 110 3,224 1 3,681

Answer 1

Divisions of duty to strengthen internal accounting control are limited as the situation allows the involvement of only two individuals: Natalie and John.

a.

1.

Natalie and not John should perform the procedure of making deposits. If performed by John, the cash could be stolen before it is deposited in the bank. The frequency of the deposits should be increased from once a week to on an as-needed basis instead of being kept in Natalie’s house, particularly if the receipts are in cash. If John was allowed to have control over the cash, he could avoid making a cash deposit and keep the cash. Later on, in the record keeping for the deposits, he could cover up the fraud.

2.

John should be assigned the task of preparing cheques with the accompanying supporting documents only when the payments are due. Natalie should be the sole signing authority on the business bank account. She should review the supporting documents and write “paid” on the invoices to avoid duplicating the payment. Natalie should mail the payments and not John. In Natalie’s absence, no payments should be made directly by John and all payments should be postponed until Natalie’s return. If John was allowed to sign cheques, he could make unauthorized payments and cover the fraud in the record keeping of the transaction.

3.

John can record the deposits in the accounting records.

4.

John can record the cheques in the accounting records.

5.

Natalie should prepare the monthly bank reconciliation. In Natalie’s absence the procedure should be postponed until her return because John could potentially cover up a mistake in the recording of transactions when preparing the bank reconciliation.

6.

The accounting information for the business could be lost or stolen if it is all stored on John’s laptop. The accounting records should be under the care and custody of Natalie. Regular back-ups should be prepared.

7.

John can be assigned the duty to prepare financial statements on the condition that any journal entries are approved by Natalie before they are entered in the accounting system.

8.

John should not be able to write cheques to himself as this leaves the company vulnerable to theft. John should submit a monthly invoice to Natalie for her approval. Natalie should then write and sign the cheque.

Having John perform a lot of the bookkeeping functions relating to the accounting system has the advantage of giving Natalie more time to do other tasks for her business. On the other hand, it opens up the possibility for some errors in accounting. Natalie will need to devote time for the review and approval of the accounting transactions initiated by John.

To get better assurance that the work performed by John is proper and timely, Natalie can do spot checks on key accounts in the accounting system. She can also access the bank records online regularly to review the activity in the business bank account and satisfy herself that all of the cash received by the business reaches the bank account and that payments out of the account are valid. This would strengthen the component of internal control for independent check for performance.

b.

Santé Smoothie Bank Reconciliation October 31, 2021 Cash balance per bank statement. Add: Deposits in transit - Oct. 28. Correction of cheque #603 ($452 - $425) $3,359 110 27 3,496 Less: Outstanding cheques No. 595.... No. 604. $238 297 Adjusted cash balance per bank 535 $2.961 Cash balance per books $3,224 Less: EFT for Telus NSF cheque Ron Black NSF fee ..... Bank service charges. Correction in Oct. 20 deposit of cash Sales ($125 - $155) ...... Adjusted cash balance per books. $85 100 35 13 30 263 $2.961 Oct. 30 Telephone Expense 85 Accounts Receivable-Black. 135 Bank Charges Expense.. 13 Sales ... 30 Cash To record bank reconciliation items. 263