Purpose of Assignment

Reconciling bank accounts is a good way to help maintain internal controls over cash. With time lags and posting errors it is easy for cash transactions to be omitted, recorded in a different accounting period, or reflect incorrect amounts. This assignment with give you practical experience in reconciling the cash balance as noted on the company books to the bank's records.

Assignment Steps

Resources:Financial Accounting: Tools for Business Decision Making

Scenario:Daisey 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 book-keeper. As a result, Bret Turrin handles all cash receipts, keeps the accounting records, and prepares the monthly bank reconciliations.

The balance per the bank statement on October 31, 2017, was $18,380. Outstanding checks were No. 62 for $140.75, No. 183 for $180, No. 284 for $253.25, No. 862 for $190.71, No. 863 for $226.80, and No. 864 for $165.28. Included with the statement was a credit memorandum of $185 indicating the collection of a note receivable for Daisey Company by the bank on October 25.

This memorandum has not been recorded by Daisey.

The company's ledger showed one Cash account with a balance of $21,877.72. The balance included undepositied cash on hand. Because of the lack of internal controls, Bret took for personal use all of the undeposited receipts in excess of $3,795.51. He then prepared the following bank reconciliation in an effort to conceal his theft of cash:

Cash balance per books, October 31		$21,877.72
Add: Outstanding checks
No. 862	$190.71
No. 863	226.80
No. 864	165.28	482.79
		22,360.51
Less: Undeposited receipts		3,795.51
Unadjusted balance per bank, October 31		18,565.00
Less: Bank credit memorandum		185.00
Cash balance per bank statement, October 31		$18,380.00

Preparea 1,050-word bank reconciliation report (hint:deduct the amount of the theft from the adjusted balance per books) including the following:

• Indicate the three ways that Bret attempted to conceal the theft and the dollar amount involved in each method.
• What principles of internal control were violated in this case?

Showall work in the Excelspreadsheet andsubmitwith the reconciliation report.

Name Section Date Problem 7-6A Daisey Company (a) DAISEY COMPANY Bank Reconciliation October 31, 2017 No. Amount No. Amount (b) and (c) (b) (c) 418 418 Problem 7-6A sey Company 418 418 Answer: Bank Reconciliation report: DAISEY COMPANY Bank Reconciliation October 31, 2017 18,380.0 0 Balance as per bank statement Less Outstanding Checks Amoun t No. 62 140.75 183 180 284 253.25 No . 86 2 86 3 86 4 Amou nt 190.71 226.8 165.28 Tota l Notes Receivable collected Adjusted balance bank statemente 1,156.79 17,223.2 1 185.00 17,408.21 21,877.7 2 3,795.51 18,082.2 1 Balance as per books Add Undeposited Receipts Adjusted balance as per biiks (b) and (c) (b) 62 183 284 140.75 180 253.25 These checks are skipped by accountant (c) Accountant also wrongly adjusted $100 in above checks Bank reconciliation statement is an important document prepared by business organizations of all sizes, so that they can match the cash balance of the bank statement with the balance on the company's financial books. Reconciliations enable in detection and prevention intentional and unintentional fraud, along with errors by bank employees, accountants, company employees and management. Although bank reconciliation is prepared on month basis but some companies with smaller cash resources might prepare it daily. Bank reconciliation Statement helps in Detection of Fraud As bank reconciliation statement is prepared to match a company's issued checks with the checks cleared from bank with the company's bank statement, a careful examine based on appropriate controls and procedures helps to reveal fraudulent activities. These can include payments for not for business purposes, payments to unauthorized employees or unauthorized vendors, and altered check amounts and details. Bank reconciliation Statement Prevents Overdraft The lag time between cash payments to vendors, employees and for expenses and payments receivable from customers can vary considerably. This is important to know this gap when a company is operating on very low cash balance. Regular bank reconciliations can help management to postpone payments that can result in company overdrafts, bounced checks and insufficient-fund fees and interest. Bank reconciliation Statement Identifies Bank Errors Bank employees can make bank errors regularly. They can transpose numbers and record the wrong check amount, record the amount to the wrong bank account, omit an amount from a company's bank statement, or can record a duplicate transaction. Reconciling the bank account with cash book helps the company to notify the bank of its error, allowing the bank to rectify the discrepancy and correct the account. Bank reconciliation Statement Improves Collection Actions Bank reconciliation helps companies in better management of their accounts receivable. If a customer's payment is cleared from the bank indicates that the receivable is no longer outstanding and therefore requires no further action. But if the client's check is not cleared that alerts management to be more aggressive in its collection efforts. Ways that Bret attempted to conceal the theft and the dollar amount involved in each method: Accountant Mr. Bret has made all his attempts to conceal his theft. He theft money of company and used for his personal use and he applied following three ways; 1. Firstly he did not show three outstanding checks as below; Ch. No. Amount 62 183 140.75 180 284 253.25 Total 574 Accountant did not show these three checks and did not reflect in bank reconciliation statement totaling to amount $574.00 2. Despite of not showing above mentioned three checks he has committed mistake of $100 as there is difference of $674 in adjusted balance as per bank statement and adjusted balance as per cash book. 3. He has taken all receipts above $3,795.51 in his personal use which need to be ascertained through proper audit and investigation. Principals of Internal Control: The purpose of standard internal control procedures are Safeguarding of Cash payments, Cash Receipts, Reconciliation, Segregation of Duties, and Other. 1. The responsible person should deposit the moneys in bank on the business day next following the day of receipt, unless the company adopts a policy permitting a different time period, not to exceed three business days next following the day of receipt, for making such deposits, and the person is able to safeguard the moneys until such time as the moneys are deposited. 2. Access to cash should be restricted at all times. It should be kept in under lock and keys, secure storage facility to which only authorized individuals have access. This can be a lockable cash drawer, safe, safe compartment or filing cabinet. The degree of security provided to safeguard cash should be commensurate with the amounts being stored. Combinations or keys to safes and other storage facilities should be restricted to the custodian of the cash and authorized back up. Combinations of locks should be changed as necessary, and whenever a person with the combination or key is replaced by another. Appropriate precautions should be taken when transporting cash from the company to bank premises. All large deposits or those deposits made on a regular basis should be arranged by the company for transport should be safeguarded. Under no circumstances should cash be sent through unsecured means of transport by an employee in an obvious container or after dark. There are set principals of internal control as regards internal control of cash which are as below; 1. Person handling cash receipts and payments called cashier should not be allowed to record cash book. 2. Different persons should be assigned different responsibilities. 3. Transaction tail should not be completed by one person single hand. 4. There should be checking of work done by one person by another. Report The accountant has committed fraud by concealing checks outstanding and by using excess cash for personal use. It is lack of internal control system and not following internal control procedures for management of cash. As per internal control management system, no person should be allowed to handle cash and maintain cash book and depositing cash in to bank and withdrawing cash from bank. It means if one person is allowed to perform this all work is allowed to conceal transactions sooner or later. Different persons should be assigned different duties and system should be such for cash management that work of one employee is cross checked by another person which will minimize theft and misappropriation of cash. Her Mr. Bret is performing all duties single hand and there is no check on his work by any other employee which has resulted in to theft of cash by Mr. Bret for his personal use. Here cash should be handled by one person and books should be recorded by another and bank reconciliation statement should be prepared by third person