Guard Dog Company recently changed its system of internal control over cash
disbursements. The system includes the following features.
Instead of being unnumbered and manually prepared, all checks must now be
prenumbered and written by using the new checkwriter purchased by the company. Before
a check can be issued, each invoice must have the approval of Jane Bell, the purchasing
agent, and Dennis Kurt, the receiving department supervisor. Checks must be
signed by either Tom Kimball, the treasurer, or Karen Thews, the assistant treasurer. Before
signing a check, the signer is expected to compare the amounts of the check with
the amounts on the invoice.
After signing a check, the signer stamps the invoice “paid” and inserts within the
stamp, the date, check number, and amount of the check. The “paid” invoice is then sent
to the accounting department for recording.
Blank checks are stored in a safe in the treasurer’s office. The combination to the
safe is known by only the treasurer and assistant treasurer. Each month the bank statement
is reconciled with the bank balance per books by the assistant chief accountant.
Instructions
Identify the internal control principles and their application to cash disbursements of
Guard Dog Company.
The internal control principles and their application to cash disbursements of Guard Dog Company are as follows:
1. Establishment of responsibilities: This principle is applied by assigning specific responsibilities to individuals involved in the cash disbursement process. For example, Jane Bell and Dennis Kurt are responsible for approving invoices, Tom Kimball and Karen Thews are responsible for signing checks, and the assistant chief accountant reconciles the bank statement.
2. Segregation of duties: This principle is applied by separating the duties of authorization, record keeping, and custody of assets. In the case of Guard Dog Company, Jane Bell and Dennis Kurt are responsible for authorizing invoices, the accounting department records the payment, and the treasurer and assistant treasurer have custody of blank checks stored in the safe.
3. Documentation procedures: This principle is applied by requiring the use of prenumbered checks and stamping the "paid" invoice with the date, check number, and amount. This helps in maintaining a proper audit trail and ensures that all payments are properly recorded.
4. Physical controls: This principle is applied by storing blank checks in a safe with limited access, known only to the treasurer and assistant treasurer. This helps prevent unauthorized use of checks and protects against theft or misuse.
5. Independent internal verification: This principle is applied by having the assistant chief accountant reconcile the bank statement with the bank balance per books. This ensures that the recorded cash disbursements are accurate and complete.
6. Sound personnel practices: This principle is implemented by having individuals with specific roles and responsibilities to carry out the cash disbursement process. Additionally, it is important to hire trustworthy personnel and provide appropriate training to ensure the effectiveness of the internal control system.
By implementing these internal control principles, Guard Dog Company aims to reduce the risk of errors, fraud, and misappropriation of cash disbursements.