Part 1.

Internal Controls

Ramona's Clothing is a retail store specializing in women's clothing. The store has established a liberal return policy for the holiday season in order to encourage gift purchases. Any item purchased during November and December may be returned through January 31, with a receipt, for cash or exchange. If the customer does not have a receipt, cash will still be refunded for any item under $75. If the item is more than $75, a check is mailed to the customer.

Whenever an item is returned, a store clerk completes a return slip, which the customer signs. The return slip is placed in a special box. The store manager visits the return counter approximately once every two hours to authorize the return slips. Clerks are instructed to place the returned merchandise on the proper rack on the selling floor as soon as possible.

This year, returns at Ramona's Clothing have reached an all-time high. There are a large number of returns under $75 without receipts.

a. How can sales clerks employed at Ramona's Clothing use the store's return policy to steal money from the cash register?

b. What internal control weaknesses do you see in the return policy that make cash thefts easier?

c. Would issuing a store credit in place of a cash refund for all merchandise returned without a receipt reduce the possibility of theft?

Classify the following as either advantages or disadvantages of issuing a store credit in place of cash.

A clerk could only issue a phony store credit rather than taking money from the cash register.

The store would lose less revenue if customers had to choose other store merchandise instead of getting a cash refund.

Issuing only a store credit for returns without a receipt is a stricter return policy that may affect gift-givers' purchase decisions.

Sales clerks will need to be trained to apply the new policy and write up a store credit. They will also need to be trained to handle the redemption of the store credit on future merchandise purchases.

d. Assume that Ramona's Clothing is committed to the current policy of issuing cash refunds without a receipt. Are there any changes that could be made in the store's procedures regarding customer refunds in order that would improve internal control?

Part 2.

Internal Control of Cash Payments

Abbe Co. is a small merchandising company with a manual accounting system. An investigation revealed that in spite of a sufficient bank balance, a significant amount of available cash discounts had been lost because of failure to make timely payments. In addition, it was discovered that the invoices for several purchases had been paid twice.

Indicate whether the procedures listed below for the payment of vendors' invoices would reduce the possibility of losing available cash discounts and of paying an invoice a second time.

1. Each voucher should be approved for payment by a designated official before verifying price, quantities, and terms.

2. Each voucher should be filed by the last day of the discount period or the due date if the invoice is not subject to a cash discount.

3. Each day, the vouchers should be removed from the appropriate section of the file and checks issued by the disbursing official.

4. At the time of payment, all vouchers and supporting documents should be stamped or perforated "Paid".

Part 3.

Entries Based on Bank Reconciliation

Which of the reconciling items listed below require an entry in the company's accounts? (None of the transactions reported by bank debit and credit memos have been recorded by the company.)

Item	Entry Required
1. Bank service charges.
2. NSF check returned to company by the bank.
3. Check incorrectly recorded by company.
4. Check incorrectly charged by bank.
5. Deposit in transit.
6. Outstanding checks.
7. Note collected by bank.

(Part 1-3 need to be answered)