Introduction
Internal control is a vital process because it gives reasonable assurance about the activities of a company and compliance with laws and regulations. Control activities seek to minimize the risks that companies face. The management often comes up with internal control measures depending on the risk level of each department. The paper seeks to prepare bank reconciliation for Daisey Company for the month of October. This reconciliation will try to establish if there is any cash stolen by the cashier who is also the bookkeeper. Finally, the paper will discuss the principles of internal control that were violated.
Bank Reconciliation
In most cases, the bank and book balance do not agree. The bank’s records are independent of those that are prepared by a company. The differences in the two balances arise because of time lags and errors. This creates the need for a bank reconciliation. It involves reconciling the bank and book balance with adjusted true cash balance (Horner, 2013). This role should be carried out by employees who do not have other cash responsibilities.
The book and bank balance for Daisey Company do not agree. The bank balance is $18,380, while the book balance is $21,877.72. The reconciliation will start by adjusting the bank balance. Thus, the undeposited receipt amounting to $3,795.51 will be added to the bank balance, while the sum of all outstanding checks ($1,156.79) will be deducted. This yields an adjusted bank balance of $21,018.72. The adjusted book balance is also expected to be the same amount.
To adjust the book balance, the value of notes receivable ($185) will be added to the book balance. This yields an adjusted balance of $22,062.72. It can be observed that the value of $22,062.72 does not match the expected balance of $21,018.72. The difference of $1,044 is the amount of cash stolen by Bret Turrin. The bank reconciliation statement for Daisey Company is presented in the attached excel file. Therefore, a reconciliation statement is an important internal control tool that helps organizations to reveal theft or misappropriation of funds (Kimmel, Weygandt, & Kieso, 2016).
How the Fraud was Concealed
Bret Turrin, the cashier and bookkeeper, concealed the theft in three ways. First, he failed to list three outstanding checks. The checks that were deliberately omitted are No.62 for $140.75, No. 183 for $180, and No.253.25. These three checks had a total of $574. The omission of these three checks implies that the reported balance of outstanding checks was understated by $574. Secondly, Bret recorded the wrong total for the three checks that were disclosed.
The three checks that were listed are No.862 for $190.71, No. 863 for $226.80, and No.864 for $165.28. The sum of the three checks is $582.79. However, the cashier listed a total of $482.79. Thus, the total was understated by $100. The third way the theft was covered is the treatment of notes receivable that was collected by the bank on behalf of Daisey Company (Marshall, McManus, & Viele, 2014).
The amount of $185 was supposed to be added to the company’s book balance. It is a cash receipt that had not been recorded in the company’s books. However, the cashier decided to deduct it from the book balance. Therefore, the amount concealed by this entry is $370 ($185 * 2). The total cash concealed using these three ways is $1,044 as revealed by the bank reconciliation (Kimmel et al., 2016).
Principles of Internal Controls That Were Violated
A review of the process of handling cash and preparation of bank reconciliation shows that there were some deficiencies in internal controls. First, there was no segregation of duties. Bret Turrin is the cashier and the bookkeeper. Therefore, he was responsible for handling cash receipts, keeping accounting records, and preparation of monthly bank reconciliation (Kimmel et al., 2016).
This violates the principle of segregation of duties because the three activities are related and ought to be carried out by different employees. Separating roles allows one member of staff to review the work of another, thus minimizing the possibility of manipulation of books of account. However, caution should be taken to ensure that there is no replication of the separated roles. Violation of the principle of segregation made it easy for Bret to steal from the company (Kimmel et al., 2016).
The second principle of internal control that was violated is independent internal verification. This principle involves appraising data prepared by members of staff. To achieve independent internal verification, the company should review the records from time to time or on a surprise basis. For instance, the company should organize surprise cash counts on a weekly basis depending on the risk level. Further, these surprise cash counts should be carried out by an independent staff member such as an internal auditor or an employee from another department (Kimmel et al., 2016). Further, any observed anomalies or discrepancies should be reported and a corrective action should be put in place.
Authorization is also a significant component of independent internal verification. For instance, all cash payments should be authorized before the transaction is made. Therefore, supervision and authorization should be instituted for important processes such as the bank reconciliation. The violation of this principle created room for theft. The company needs to strengthen internal controls for cash (Goyal & Goyal, 2013).
Conclusion
The discussion above underscores the importance of having functional internal control mechanisms in a company. A bank reconciliation statement is an important avenue that reveals whether internal controls for cash are working as expected. However, there is a need for the proper segregation of duties to be instituted for its importance to be realized. In the paper, the bank reconciliation that was prepared revealed that there was a theft amounting to $1,044.
The cashier and bookkeeper concealed this theft by failing to disclose some of the outstanding checks. Also, he understated the total for the listed outstanding checks. Further, he made an erroneous entry for cash collected by the bank on behalf of the company. The analysis further revealed that the cashier and bookkeeper succeeded in stealing and concealing because of the weaknesses in internal control. The two main principles of internal control that were violated are the segregation of duties and independent internal verification. Internal controls are important, but caution should be taken to ensure that the anticipated benefits do not exceed the associated costs, especially when the company is small in size.
References
Goyal, V. K., & Goyal, R. (2013). Financial accounting (4th ed.). New Delhi, India: PHI Learning Private Limited.
Horner, D. (2013). Accounting for non-accountants (9th ed.). Philadelphia, PA: Kogan Page Limited.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2016). Financial accounting: Tools for business decision making (8th ed.). New Jersey, NJ: John Wiley & Sons, Inc.
Marshall, D. H., McManus, W. W., & Viele, D. F. (2014). Accounting: What the numbers mean (10th ed.). New York, NY: McGraw-Hill/Irwin.