prepared the following bank reconciliation in an effort to conceal his theft of cash..:.Instructions(a) Prepare a correct bank reconciliation. (Hint: Deduct the amount of the theft from theadjusted balance per books.)(b) Indicate the three ways that Terry attempted to conceal the theft and the dollar amountinvolved in each method.(c) What principles of internal control were violated in this case?SOLUTION:
(a)HEISEY COMPANYBank ReconciliationOctober 31, 2014Balance per bank statement...............................................................................$18,380.00Plus:Undeposited receipts...............................................................................3,795.51Less:Outstanding checksNo.AmountNo.Amount62183284$140.75180.00253.25862863864$190.71226.80165.28............................1,156.79Adjusted balance per bank.................................................................................$21,018.72Cash balance per books......................................................................................$21,877.72Add:Bank credit (collection of note receivable).............................................185.00Adjusted balance per books (before theft).........................................................22,062.72Less:Theft ($22,062.72 – $21,018.72).............................................................1,044.00Adjusted balance per books...............................................................................$21,018.72
(b)The cashier attempted to cover the theft of $1,044.00 by:1.Not listing as outstanding three checks totaling $574.00 (No. 62, $140.75;No. 183, $180.00; and No. 284, $253.25).2.Underfooting the outstanding checks listed by $100. (The correct total is$582.79.)3.Subtracting the $185 credit from the bank balance instead of adding it to thebook balance, thereby concealing $370 of the theft.(c)1.The principle of independent internal verification has been violated becausethe cashier prepared the bank reconciliation.2.The principle of segregation of duties has been violated because the cashierhad access to the accounting records and also prepared the bank reconciliation.
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May 23, 2022 May 23, 2022/ Steven Bragg
The separation of duties concept prohibits the assignment of responsibility to one person for the acquisition of assets, their custody, and the related record keeping. For example, one person can place an order to buy an asset, but a different person must record the transaction in the accounting records. By separating duties, it is much more difficult to commit fraud, since at least two people must work together to do so - which is far less likely than if one person is responsible for all aspects of an accounting transaction.
Examples of the Separation of Duties
Examples of the separation of duties are noted below for a variety of functional areas.
Separation of Duties for Cash
One person opens envelopes containing checks, and another person records the checks in the accounting system. This reduces the risk that checks will be removed from the company and deposited into a person's own checking account.
Separation of Duties for Accounts Receivable
One person records cash received from customers, and another person creates credit memos to customers. This reduces the risk that an employee will divert an incoming payment from a customer and cover the theft with a matching credit to that customer's account.
One person orders goods from suppliers, and another person logs in the received goods in the accounting system. This keeps the purchasing person from diverting incoming goods for his own use.
Separation of Duties for Payroll
One person compiles the gross pay and net pay information for a payroll, and another person verifies the calculations. This keeps a payroll clerk from artificially increasing the compensation of some employees, or from creating and paying fake employees.
Problems with the Separation of Duties
A problem with the separation of duties is that it is much less efficient and more time-consuming than having a single person be responsible for all aspects of a transaction. Thus, you should examine the tradeoff between increasing the level of control and reducing the amount of efficiency when deciding whether to implement the separation of duties in some areas. It is quite possible that the improvement in control is not sufficient to offset the reduced level of efficiency.
A misconception about the separation of duties is that it reduces the amount of accounting errors. This only happens if there is duplicate data entry, or if multiple people verify each others' work. This is not the goal of the separation of duties concept, which is targeted at giving certain tasks to one person, and other tasks to another person - the concept is not designed for the duplication of tasks, so accounting errors are not likely to be reduced.
Terms Similar to the Separation of Duties
The separation of duties is also known as the segregation of duties.
May 23, 2022/ Steven Bragg/