Cash Management and Bank Reconciliation

Gazarra Company is a very profitable small business. It has not, however, given much

consideration to internal control. For example, in an attempt to keep clerical and office

expenses to a minimum, the company has combined the jobs of cashier and bookkeeper. As a

result, Johnny Stacatto handles all cash receipts, keeps the accounting records, and prepares

the monthly bank reconciliations.

The balance per the bank statement on October 31, 2010, was $15,453. Outstanding checks

were: no. 62 for $107.74, no. 183 for $127.50, no. 284 for $215.26, no. 862 for $162.10, no.

863 for $192.78, and no. 864 for $140.49. Included with the statement was a credit

memorandum of $340 indicating the collection of a note receivable for Gazarra Company by

the bank on October 25. This memorandum has not been recorded by Gazarra Company.

The company's ledger showed one cash account with a balance of $18,608.81. The balance

included undeposited cash on hand. Because of the lack of internal controls, Stacatto took for

personal use all of the undeposited receipts in excess of $3,226.18. He then prepared the

following bank reconciliation in an effort to conceal his theft of cash.

Bank Reconciliation

Cash balance per book, October, 31 $18,608.81

Add: Outstanding checks

No. 862 $162.10

No. 863 $192.78

No. 864 $140.49 $410.31

$19,019.18

Less: Undeposited receipts $3,226.18

Unadjusted balance per bank, October 31 $15,793.00

Less: Bank credit memorandum 340.00

Cash balance per bank statement, October 31 $15,453.00

Instructions

(a) Please prepare a correct bank reconciliation. (Hint: Deduct the amount of the theft from the

adjusted balance per books.)

(b) Indicate the three ways that Stacatto attempted to conceal the theft and the dollar

amount pertaining to each method.

(c) What principles of internal control were violated in this case?