Judgment Case 7-5

For each of the three independent scenarios below, indicate whether there is an internal control weakness. If there is no weakness, explain why the scenario represents adequate internal control. If there is a weakness, suggest alternative procedure(s) to eliminate the weakness.

Scenario 1 John Smith is the petty cash custodian. John approves all requests for payment out of the $200 fund, which is replenished at the end of each month. At the end of each month, John submits to his supervisor a list of all accounts and amounts to be charged, along with supporting documentation. Once the supervisor indicates approval, a check is written to replenish the fund for the total amount. John's supervisor performs surprise counts of the fund to ensure that the cash and/or receipts equal $200 at all times.

Scenario 2 All of the companys cash disbursements are made by check. Each check must be supported by an approved voucher, which is in turn supported by the appropriate invoice and, for purchases, a receiving document. The vouchers are approved by Dean Leiser, the chief accountant, after reviewing the supporting documentation. Betty Hanson prepares the checks for Leisers signature. Leiser also maintains the companys check register (the cash disbursements journal) and reconciles the bank account at the end of each month.

Scenario 3 Fran Jones opens the companys mail and makes a listing of all checks and cash received from customers. A copy of the list is sent to Jerry McDonald who maintains the general ledger accounts. Fran prepares and makes the daily deposit at the bank. Fran also maintains the subsidiary ledger for accounts receivable, which is used to generate monthly statements to customers.