Reconciling Bank Accounts Is A Good Way To Help Maintain Int
Reconciling Bank Accounts Is A Good Way To Help Maintain Internal Cont
Reconciling bank accounts is a good way to help maintain internal controls over cash. With time lags and posting errors, cash transactions can be omitted, recorded in a different accounting period, or reflect incorrect amounts. This assignment gives practical experience in reconciling the cash balance on the company books to the bank's records, highlighting internal control vulnerabilities and the importance of proper reconciliation procedures.
Paper For Above instruction
The purpose of this report is to prepare a bank reconciliation statement for Daisey Company as of October 31, 2017, and to analyze the internal control violations demonstrated by the actions of Bret Turrin, the combined cashier and bookkeeper. Additionally, it will identify how Bret attempted to conceal cash thefts, quantify the amounts involved, and discuss the internal control principles that were violated in this case.
Daisey Company is a small but profitable enterprise that has not prioritised internal controls over cash management. Bret Turrin's dual role of handling cash receipts, maintaining accounting records, and preparing bank reconciliations created significant risk for misappropriation of cash. The bank statement, with a balance of $18,380, and the company's ledger, with a balance of $21,877.72, show discrepancies that can be attributed to timing differences, recording errors, and thefts.
The first step in the reconciliation process involves adjusting the bank statement balance for outstanding checks and deposits in transit. Outstanding checks No. 862 ($190.71), No. 183 ($180), No. 284 ($253.25), No. 862 ($190.71), No. 863 ($226.80), and No. 864 ($165.28) total $1,205.80. Since the outstanding checks are checks issued but not yet cleared, they are subtracted from the bank statement balance.
In addition, a credit memorandum of $185 from the bank for the collection of a note receivable has not yet been recorded by Daisey Company. This amount increases the company's cash balance once properly recorded in the books, so it should be added to the book balance.
The company's ledger shows an unadjusted balance of $21,877.72, which includes undeposited cash. However, Bret Turrin took cash for personal use from receipts exceeding $3,795.51 that were not deposited. This theft directly affects the cash balance and needs to be deducted from the books to reflect the actual cash on hand.
The initial discrepancy between the ledger balance and the bank statement demonstrates the importance of regular reconciliation to detect internal control weaknesses and irregularities such as thefts.
Step 1: Adjusting the Book Balance
Starting with the ledger balance of $21,877.72:
- Add: Bank collection (note receivable): $185
- Less: Undeposited receipts taken for personal use: $3,795.51
Adjusted Book Balance:
$21,877.72 + $185 - $3,795.51 = $18,267.21
Step 2: Adjusting the Bank Statement Balance
Bank statement balance: $18,380.00
Less: Outstanding checks totaling $1,205.80
Adjusted bank balance:
$18,380.00 - $1,205.80 = $17,174.20
Add: Bank collection not yet recorded in books: $185
Adjusted bank balance:
$17,174.20 + $185 = $17,359.20
The adjusted bank balance ($17,359.20) does not match the adjusted book balance ($18,267.21), indicating additional discrepancies likely due to unrecorded theft.
Step 3: Recognizing the Theft and Concealment Methods
Bret Turrin attempted to conceal his thefts using three main methods:
1. Omission of Deposits:
He diverted cash receipts into personal use instead of depositing all proceeds into the bank, specifically taking cash exceeding $3,795.51. This was concealed by not recording the full amount of receipts, thereby understating cash in the books.
2. Altered Reconciliation Figures:
He prepared bank reconciliations that understated outstanding checks or manipulated the figures to hide cash shortages. For instance, incorrectly including or omitting certain disbursements made the reconciliation appear consistent with the bank statement.
3. Unauthorized Adjustment of Records:
He adjusted the company's ledger to conceal thefts, for example, by not recording the stolen cash or falsely adding collections to cover shortages, falsely balancing the books.
The total theft involved at least $3,795.51 from undeposited receipts, which Bret used for personal purposes.
Step 4: Principles of Internal Control Violated
This case illustrates several internal control principles that were violated:
- Segregation of Duties:
Bret's role in handling cash, recording transactions, and reconciling bank statements allowed him to conceal thefts.
- Authorization and Approval:
No oversight or managerial review was in place to verify large cash transactions or reconcile discrepancies systematically.
- Physical Controls over Cash:
The absence of secure cash handling and deposit procedures facilitated thefts.
- Independent Reconciliation:
Bret prepared his own bank reconciliations without oversight, enabling him to hide irregularities.
- Recordkeeping Integrity:
Falsifying or modifying records compromised financial integrity, making detection more difficult.
Conclusion
The analysis reveals a significant internal control breakdown within Daisey Company, allowing Bret Turrin to steal cash totaling at least $3,795.51. Proper segregation of duties, oversight, and regular audits are crucial controls to prevent such misconduct. The bank reconciliation process is a vital tool for detecting discrepancies, and when combined with sound internal controls, it can serve as an effective safeguard for cash assets.
References
- Anthony, R. N., & Govindarajan, V. (2014). Management Control Systems (13th ed.). McGraw-Hill Education.
- Horngren, C. T., Sundem, G. L., Elliott, J. A., & Philbrick, D. R. (2013). Introduction to Financial Accounting (11th ed.). Pearson.
- Whittington, G., & Cauble, E. (2017). Principles of Auditing & Assurance. Cengage Learning.
- Rezaee, Z. (2005). Corporate Governance and Ethic. Journal of Business Ethics, 59(4), 375–399.
- Arens, A. A., Elder, R. J., & Beasley, M. S. (2017). Auditing and Assurance Services (15th ed.). Pearson.
- Gordon, R. A., & Loebbecke, J. K. (2004). Internal Control and Fraud Prevention. Journal of Contemporary Business, 35(2), 89–95.
- Albrecht, W. S., Albrecht, C. C., Albrecht, C. O., & Zimbelman, M. F. (2017). Fraud Examination (6th ed.). Cengage Learning.
- Komissarov, M. (2014). Reconciliation Procedures and Internal Controls. International Journal of Auditing, 18(2), 143–154.
- Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The Economic Implications of Corporate Financial Reporting. Journal of Accounting and Economics, 40(1-3), 3–73.
- Committee of Sponsoring Organizations of the Treadway Commission (COSO). (2013). Internal Control—Integrated Framework.