Problem 6-17B: 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. Linda Hinson, the administrative assistant in charge of payroll, created a fictitious employee, wrote weekly checks to the fictitious employee, and then personally cashed the checks for her own benefit.

b. Jim Stewart, the receiving manager of Western Lumber, created a fictitious supplier named B&A Building Supply. B&A regularly billed Western Lumber for supplies purchased. Stewart had printed shipping slips and billing invoices with the name of the fictitious company and opened a post office box as the mailing address. Stewart simply prepared a receiving report and submitted it for payment to the accounts payable department. The accounts payable clerk then paid the invoice when it was received because Stewart acknowledged receipt of the supplies.

c. Jalie Thomas works at a local hobby shop and usually operates the cash register. She has developed a way to give discounts to her friends. When they come by, she rings a lower price or does not charge the friend for some of the material purchased. At first, Thomas thought she would get caught, but no one seemed to notice. Indeed, she has become so sure that there is no way for the owner to find out that she has started taking home some supplies for her own personal use.

Problem 6-18B: Preparing a Bank Reconciliation

Bill Lewis owns a construction business, Lewis Supply Co. The following cash information is available for the month of October Year 1.

As of October 31, the bank statement shows a balance of $21,400. The October 31 unadjusted balance in the Cash account of Lewis Supply Co. is $18,400. A review of the bank statement revealed the following information:

1. A deposit of $2,600 on October 31, Year 1, does not appear on the October 31 bank statement.
2. A debit memo for $75 was included in the bank statement for the purchase of a new supply of checks.
3. When checks written during the month were compared with those paid by the bank, three checks amounting to $2,075 were found to be outstanding.
4. It was discovered that a check to pay for repairs was correctly written and paid by the bank for $1,500 but was recorded on the books as $5,100.

Required:

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

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