Embezzlement Issues

D. J. Fletcher, a trusted employee of Bluestem Products, found himself in personal financial difficulties and decided to borrow $3,000 from the company and to conceal his theft.

As a first step, Fletcher removed $3,000 in currency from the cash register. This amount represented the bulk of the cash received in over-the-counter sales during the three business days since the last bank deposit. Fletcher then removed a $3,000 check from the days incoming mail; this check had been mailed in by a customer, Michael Adams, in full payment of his account. Fletcher made no journal entry to record the $3,000 collection from Adams, but deposited the check in Bluestem Productss bank account in place of the $3,000 over-the-counter cash receipts he had stolen.

In order to keep Adams from protesting when his month-end statement reached him, Fletcher made a journal entry debiting Sales Returns and Allowances and crediting Accounts Receivable Michael Adams. Fletcher posted this entry to the two general ledger accounts affected and to Adamss account in the subsidiary ledger for accounts receivable.

a.Did these actions by Fletcher cause the general ledger to be out of balance or the subsidiary ledger to disagree with the control account? Explain.

b.Assume that Bluestem Products prepares financial statements at the end of the month without discovering the theft. Would any items in the balance sheet or the income statement be in error? Explain.

c.Several weaknesses in internal control apparently exist in Bluestem Products. Indicate three specific changes needed to strengthen internal control over cash receipts.