Question

During the preparation of the bank reconciliation for New Concepts Co., Peter Fikes, the assistant controller, discovered that City National Bank incorrectly recorded a $710 check written by New Concepts Co. as $170. Peter has decided not to notify the bank but wait for the bank to detect the error. Peter plans to record the $540 error as Other Income if the bank fails to detect the error within the next three months.

-Discuss whether Peter is behaving in a professional manner. What would you do?

-As Peter’s supervisor how would you handle this situation if you found out what Peter had done?

-How would you explain the need for this to be handled correctly?

-Why are bank reconciliations so important?

Answer 1

-Discuss whether Peter is behaving in a professional manner. What would you do?

Peter is behaving in an unprofessional manner. He ought to return money paid by mistake by the bank.

-As Peter’s supervisor how would you handle this situation if you found out what Peter had done?

As Peter's supervisor, I would direct Peter to show the item as a reconcilitation item and to notify the bank about it.

-How would you explain the need for this to be handled correctly?

I would explain to Peter that, the relationship with a bank is a continuing one and is based on mutual trust. If the bank comes to know that we have not notified even after knowing it, the bank will no longer trust us. The bank will no longer take us for our word in future.

-Why are bank reconciliations so important?

Bank reconciliation is important for the following reasons:

*It ensures accuracy of records kept of the dealings with the bank.

*By getting the reconciliation done by a person not handling transactions with the bank, internal check is established.

*It can detect and prevent frauds by those who handle cash/checks and deal with the bank accounts of the firm.

*Mistakes made by the bank can be found out.

*NSF checks can be known immediately and action can be taken.