P8-1A)

1. Violates separation of duties. The company should implement a policy whereby the
person recording incoming cash receipts is not responsible for posting the payments to
the customer accounts.
2. Violates the principle of establishing responsibility. Only Julia should have access to the
petty cash fund since she is the custodian. The company should implement a policy of
not allowing petty cash transactions over the lunch hour. Alternatively, Justine could
also serve as a petty cash custodian with his own petty cash fund.
3. Violates the proper application of technological controls. While the daily backup is a
very good internal control, the tape needs to be taken off the premises every night. If
the building and computer are destroyed, the data then can be restored from the tape
since it is safely kept off the premises. The company should implement a policy of
storing tapes off the premises nightly.
4. Violates regular and independent review. Benedict Shales needs to implement a way to
regularly and independently review his employees. Hiring of internal auditors or an
outside consultant to objectively review the internal controls and the employees work
needs to be implemented.
5. Violates the insuring of assets and the bonding of key employees. We do not have enough
information to know if the company can afford the move to the higher deductible on the
property insurance. However, we can say that dropping the insurance for bonding the
employees weakens internal control. If the company does need to engage in cost cutting
they should do it without compromising its internal controls. The insurance for the
bonding of employees (or at least key employees and those in sensitive positions) should
be reinstated.
P8-3A)

Part 1
May 1 Petty Cash...............................................................................
Cash...................................................................................
To establish the $300 petty cash fund.

300.00

May 15 Janitorial Expenses................................................................

Miscellaneous Expenses.........................................................
Postage Expenses....................................................................
Advertising Expense...............................................................
Cash Over and Short........................................................
Cash...................................................................................
To reimburse the petty cash fund.

88.00
53.68
53.50
47.15

May 16 Petty Cash...............................................................................

Cash...................................................................................
To increase the petty cash fund to $500.

200.00

300.00

4.48
237.85

200.00

Note: The May 31 entries can be combined into one entry.

May 31 Postage Expenses....................................................................
Mileage Expense.....................................................................
Delivery Expense....................................................................
Cash Over and Short..............................................................
Cash...................................................................................
To reimburse the petty cash fund.

147.36
23.50
34.75
6.19

May 31 Cash.........................................................................................
Petty Cash.........................................................................
To decrease the petty cash fund to $400.

100.00

211.80

100.00

Part 2
If the May 31 replenishment is not made and no entry is recorded, then several expenses
would not be recognized and both net income and equity would be overstated by $211.80
($147.36 + $23.50 + $34.75 + $6.19). Also, the petty cash asset and total assets would be
overstated by $211.80.