Problem 6-17A: Using internal control to restrict illegal or unethical behavior

For each of the following fraudulent acts, describe one or more internal control procedures that could have prevented (or helped prevent) the problems.

a. Everyone in the office has noticed what a dedicated employee Carley Trap is. She never misses work, not even for a vacation. Trap is in charge of the petty cash fund. She transfers funds from the company’s bank account to the petty cash account on an as-needed basis. During a surprise audit, the petty cash fund was found to contain fictitious receipts. Over a three-year period, Trap had used more than $4,000 of petty cash to pay for personal expenses.

b. Doug Clampet was hired as the vice president of the manufacturing division of a corporation. His impressive resume listed a master’s degree in business administration from a large state university and numerous collegiate awards and activities, but in truth Clampet only had a high school diploma. Soon, the company was in poor financial condition because of his inadequate knowledge and bad decisions.

c. Stone Manufacturing has good internal control over its manufacturing materials inventory. However, office supplies are kept on open shelves in the employee break room. The office supervisor has noticed that he is having to order paper, tape, staplers, and pens with increasing frequency.

Problem 6-18A: Preparing a bank reconciliation

Rick Hall owns a card shop: Hall’s Cards. The following cash information is available for the month of August Year 1.

As of August 31, the bank statement shows a balance of $16,140. The August 31 unadjusted balance in the Cash account of Hall’s Cards is $14,100. A review of the bank statement revealed the following information:

1. A deposit of $4,150 on August 31, Year 1, does not appear on the August bank statement.
2. It was discovered that a check to pay for baseball cards was correctly written and paid by the bank for $4,500 but was recorded on the books as $5,400.
3. When checks written during the month were compared with those paid by the bank, three checks amounting to $5,370 were found to be outstanding.
4. A debit memo for $80 was included in the bank statement for the purchase of a new supply of checks.

Required

a. Prepare a bank reconciliation at the end of August showing the true cash balance.

b. Prepare any necessary journal entries to adjust the books to the true cash balance.

Problem 6-19A Missing information in a bank reconciliation

The following data apply to Pro Beauty Supply Inc. for May Year 1:

1. Balance per the bank on May 31: $9,150.
2. Deposits in transit not recorded by the bank: $1,510.
3. Bank error; check written by Best Beauty Supply was charged to Pro Beauty Supply’s account: $560.
4. The following checks written and recorded by Pro Beauty Supply were not included in the bank statement:
   • 3013 $510
   • 3054 $640
   • 3056 $1,520
5. Note collected by the bank: $500.
6. Service charge for collection of note: $20.
7. The bookkeeper recorded a check written for $320 to pay for the May utilities expense as $230 in the cash disbursements journal.
8. Bank service charge in addition to the note collection fee: $40.
9. Customer checks returned by the bank as NSF: $310.

Required
Determine the amount of the unadjusted cash balance per Pro Beauty Supply’s books.