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In: Accounting

ANSWER ANY 2 PLEASE. Q: Why do we spend so much time on internal control for...

ANSWER ANY 2 PLEASE.

Q: Why do we spend so much time on internal control for cash receipts and disbursements? Shouldn’t we be just as concerned over other assets? Expenses? Revenue? Liabilities?

Q: A grocery store decides to install a point-of-sale system that will allow the customer to use his or her ATM card to pay for merchandise at the checkout line. Previously, the grocery store has accepted only cash and checks as payment. Identify the control risk associated with this system and name procedures that can be implemented to counterbalance the risk.

Q: Why do we worry about deposits in transit and outstanding checks? Won’t they “work themselves out” the following month?

Solutions

Expert Solution

Q: Why do we spend so much time on internal control for cash receipts and disbursements? Shouldn’t we be just as concerned over other assets? Expenses? Revenue? Liabilities?

A: Internal control for cash receipts and disbursement cannot be treated as insignificant part of today’s business. Big firms always need employees to handle these functions which are the crucial parts of Finance Department. For a vendor or supplier to the firm, it can be a disastrous experience if any delay or wrong amount. Few Vendors may charge penalty as well. It may disrupt the image of firm in market if there is any delay in significant payments.

Company doesn’t spend much time on daily basis. A function is a group of people which takes care of all the item. For Cash receipts, there is always a designated person to collect and deposit it in bank. Since the same person is going to bank, he will be handling few clerical works with bank too (all the forms deposit and all). So, Company takes a lot from one person and the same person will be managed by a Finance Manager; internal control chain is automated. Imagine a construction company having 400 workers on a site who are being paid in cash on daily basis. Firm will appoint a minimum of 2 persons to manage it well and a small visit of further senior member periodically. Audit becomes important in these kind of scenarios.

A company is usually concerned for all the things since its investor money. Board of Director who are responsible to Chairman of the company cannot ignore any material item. You see, Materiality plays a big role. If an organization is having less cash transaction, it will not spend much time and can get this done easily from an employee working with bank.

Q: Why do we worry about deposits in transit and outstanding checks? Won’t they “work themselves out” the following month?

  • Mercantile system of Accounting leaves us with a rule to record all the outstanding checks in books and Bank Balance may be different due to those checks which are still not cleared by vendor to bank or by bank itself.
  • Usually accounting software take care of all the deposits in transit and outstanding checks. So, we need not worry about the records since all the payments are recorded with check details, date and amount.
  • Outstanding checks come with an expiry date (say 3 months). After 3 months, that check will be useless, just a piece of paper. Variety of rules exist in different countries for invalidity of check.
  • Every month end, firm matches its bank book balance with their original balance with bank. Sometime it doesn’t matches. At the time of finalization of balance sheets, be it quarterly or yearly, it becomes imperative to see the reason for mismatch. That reason is defined by Bank Reconciliation Statement. This serves as a proof to Auditor, though Auditor will check all the entities.

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