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Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition by Donald E. Kieso, Paul D. Kimmel, Jerry J. Weygandt

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SOLUTION TO EXERCISE 7-1

Weakness Principle
1. Checks are not prenumbered. (Checks should be prenumbered and subsequently accounted for.) Documentation procedures.
2. Checks are not stored in a secure area. (Checks should be stored in a safe or locked file drawer.) Physical controls.
3. The approval and payment of bills is done by the same individual. (One person, such as the store manager, should approve bills for payment and another person, possibly the assistant manager, should sign and issue checks.) Segregation of duties.
4. The bank reconciliation is not prepared on a timely basis. (It should be prepared monthly soon after the bank statement is received.) Independent internal verification (also called independent check).
5. Employees who handle cash are allowed to work continuously. A company should rotate employees' duties and require employees to take vacations. These measures deter employees from attempting thefts since they will not be able to permanently conceal their improper actions. Human resource controls.

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