NAME:NINA MAE O.

DIAZ BSA 3A

CHAPTER 15

QUESTIONS

1. Define what is meant by a control and weakness in internal control. Give two examples of
each in the sales and collection cycle.
Internal controls are the systems, policies, and procedures that a company employs to
ensure the accuracy of its financial and accounting data. Mistakes in recording accounts, for
example, and an account's failure to apply basic accounting rules in the sales and collection
cycle are examples of errors in financial statement production. As a result, the term
"weakness" refers to a defect in internal control implementation or design.
2. Frank Dizon, a highly competent employee of Breezewater Sales Corporation, had been
responsible for accounting-related matters for two decades. His devotion to the firm and his
duties has always been exceptional, and over the years, he had been given increased
responsibility. Both the president of Breezewater and the partner of an independent CPA firm
in charge of the audit were shocked and dismayed to discover that Dizon had embezzled more
than P5,000,000 over a 10-year period by not recording billings in the sales journal and
subsequently diverting the cash receipts. What major factors permitted the defalcation to the
place?

The major factors that permitted the defalcation to the place are the following:

Absence of segregation of duties.

It is advised that the following activities/responsibilities relating to a single transaction should be

performed by different people:

A. Recording of the transaction

B. Authorising of the transaction

C. Safekeeping/ physical custody of any related asset

D. Reconciliation

In the above situation, if there was segregation of duties the embezzlement wouldn't have been
possible.

Lack of close supervision on the employee.

Absence of strong internal audit function within the organisation.

Regardless of how trustworthy Frank Dizon appeared, no employee has to be given the combined
responsibility of accounting the assets and custody of those assets.
EXERCISES

Exercise 1

Required: For each misstatement, list an internal control that should prevent it.

a. Cash received from collections of accounts receivable in the subsequent period is recorded
as current period receipts.
A recording cut-off should be present. This indicates that a policy will be implemented in
which the recording of receivables will have a cut-off at the conclusion of the accounting
period to regulate the accounts recorded.
The uncollectible account is insufficient because the customer failed to account for poor
economic circumstances in the allowance.
Maintain a record of receipts and compare prior cash receipts to those of the current year
to see whether there are any changes in collectability represented.

b. Several accounts receivables are in dispute as a result of claims of defective merchandise

Because there are claims of defective products, adequate and quick
documentation is required; this will keep the balance of accounts receivable
as accurate as possible.
c. Goods shipped and included in the current period sales were returned in the subsequent
period.
This should be carefully recorded upon receiving the returned products since it will produce
a discrepancy if not given suitable accounting treatment right once.
d. Several accounts receivable in the accounts receivable master file are not included in the
aged trial balance.
A third party/auditor should reconcile the accounts receivable master file after comparing
the old trial balance to the general ledger.
One receivable from the master file of accounts receivable appears twice on
the aged trial balance.
Similar to the prior instance, an independent person or auditor should
reconcile the accounts receivable master file, and the general ledger should
be compared to the aged trial balance.

e. Long-term interest-bearing notes receivable from affiliated companies are included in

accounts receivable.
In addition to the general ledger of the firm, there should be a separate entry in a subsidiary
ledger for the related companies to avoid this problem.
f. The trial balance total does not equal the amount in the general ledger.
To reconcile the trial balance to the general ledger, find the uneven journal entry in the
general ledger.
Exercise 2

WEAKNESS RECOMMEND IMPROVEMENTS

No declaration is made of bonding. Participants and key workers who collect and pay
cash must be bonded.

There was no support for the envelope system. It is important to advertise the envelope system.
Functional controls it could give were neglected. Ushers should write the contribution amount on
an external envelope. The empty collecting
envelopes are identified, and each envelope
donation is reported separately.

The finance committee is responsible for the To carry out routine audit procedures or to
auditing function and the management of the include independent auditors, an audit
cash function; however, the auditing functions committee should be established.
have not been carried out by the latter

The Finance Committee does not exercise its The Budget Committee needs to be more
collecting duties. involved in overseeing.

Apparently, no written guidelines have been Increase the number of counters to at least two,
developed for processing cash collections. and keep the currency under observation until it
has been tallied and recorded in order to spot
any irregularities.

Too much control over collecting was exerted by As far as feasible, the Financial Secretary's duties
the Finance Secretary. should be restricted to record keeping.

Exercise 3

For each of the following misstatements in property, plants, and equipment accounts, state an
internal control that the client could install to prevent the misstatement from occurring.

1. The asset lives used to depreciate equipment are less than reasonable, expected useful lives.
Answer: use of the depreciation table from government studies.

2. Capitalizable assets are routinely expensed as repairs and maintenance, perishable tools, or
supplies expense.
Answer: Establish a system for internal verification and a policy for determining whether
things need to be capitalized.
 3. Construction equipment that is abandoned or traded for replacement equipment is not
removed from the accounting records.
Answer: Have the office manager send out a report on any replacements or abandonments on
a regular basis.
4. Depreciation expense for manufacturing operations is charged to administrative expenses.
Answer:Internally check the depreciation expenditure charges.
Tools necessary for the maintenance of equipment are stolen by company employees for their
personal use.
Answer: Assign tools to individual foreman and periodically count the tools.

5. Acquisitions of property are recorded at an improper amount.

Answer: Require internal verification in the recording of property acquisitions.

6. A loan against existing equipment is not recorded in the accounting records. The cash receipts
from the loan never reached the company because they were used for the down payment on
piece of equipment now being used as an operating asset. The equipment is also not recorded in
the records.
Answer: Require the deposit of all cash directly into the bank account.

MULTIPLE CHOICE QUESTIONS

1. If preparation of a periodic scrap report is essential in order to maintain adequate control over the
manufacturing process, the data for this report should be accumulated in the

a. Accounting department.
b. Production department.
c. Warehousing department.
d. Budget department.

2. Which of the following is not an internal control weakness related to factory equipment?

a. Checks issued in payment of acquisitions of equipment are not signed by the controller.
b. All acquisitions of factory equipment are required to be made by the department in need of
the equipment.
c. Factory equipment replacements are generally made when estimated useful lives, as indicated
in depreciation schedules, have expired.
d. Proceeds from sales of fully depreciated equipment are credited to other income.

3. With respect to an internal control measure that will ensure accountability for fixed asset
retirements, management should implement controls that include

a. Continuous analysis of miscellaneous revenue to locate any cash proceeds from sale of plant
assets.
b. Periodic inquiry of plant executives by internal auditors as to whether any plant assets have
been retired.
c. Continuous use of serially numbered retirement work orders.
 d. Periodic observation of plant assets by the internal auditors.

4. In a company whose materials and supplies include a great number of items, a fundamental
deficiency in control requirements would be indicated if

a. Perpetual inventory master file is not maintained for items of small value.
b. The storekeeping function were to be combined with production and record keeping.
c. The cycle basis for physical inventory taking was to be used.
d. Minor supply items were to be expensed when acquired.

5. For control purposes, the quantities of materials ordered may be omitted from the copy the
purchase order that is

a. Forwarded to the accounting department.

b. Retained in the purchasing department's files.
c. Returned to the requisitioner.
d. Forwarded to the receiving department.

6. Which of the following procedures would best detect the theft of valuable items from an inventory
that consists of hundreds of different items selling for P10 to P100 and a few items selling for
hundreds of pesos?

a. Maintain a perpetual inventory master file of only the more valuable items with frequent
periodic verification of the validity of the perpetuals.
b. Have an independent CPA firm prepare an internal control report on the effectiveness of the
administrative and accounting controls over inventory.
c. Have separate warehouse space for the move valuable items with sequentially numbered
tags.
d. Require an authorized officer's signature on all requisitions for the more valuable items.