Question

Part I

(1) Jill, a supervisor at a construction company, distributes payroll and has authority to hire and fire employees. How might the owner of the construction company determine whether Jill has fictitious employees on the payroll and is secretly cashing their payroll checks for herself?

(2) Please explain why it is desirable to have at least two officials approve pay rate changes.

Part II

Jet-Clean sold washing machines totaling $1 million. Each washing machine carries a three-year warranty. Jet-Clean estimates that warranty repairs on the washing machines will cost 1 percent of the sales price.

   (1) Record the entry to accrue Jet-Clean’s warranty costs.

   (2) Jet-Clean paid $750 for washing machine repairs under warranty. Please record this entry.

Answer 1

Part-1 Atleast two officials to approve payroll rate changes

It is to desirable to have atleast two officials to approve pay rate changes because errors and/ot frauds may occur if no such authorization levels are placed. These internal controls of placing officials for authorization of activities ensures correctness and true and fair values of expenditures will be incurred. It encourages the internal control by seperating the one's person work who is acting as both maker and Checker.

In the given case due to lack of such authorization officials, the supervisor, Jill may show fictitious employees on the payroll and may secretly cash their payroll checks.

If we have atleast two officials one will act as preparatory authority and other will act as approving the prepared data authority thereby dividing the one's work into strong internal controls practices.

Part-2

Year 1

Warranty expense a/c Dr 10,000(1 million x 1%)

To warranty costs liability a/c. Cr 10,000

[being estimated warranty expense recorded]

Warranty costs laibiltiy a/c Dr 750

To Cash a/c Cr. 750

[Being actual warranty costs incurred ]