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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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EXERCISE 7-2

Purpose: (L.O. 2, 3, 4) This exercise will illustrate the need for certain internal control procedures. Four independent situations appear below:

Situation 1: The Broadway Cinema Company operates six movie screens in a local mall. Although the cashier gives a ticket to each customer upon payment of the movie price, no one collects the ticket as the customer enters the theater.

Situation 2: Home Gadgets sells a multitude of housewares. Although there is a register at the check out counter, it has been situated so that the customer cannot see the display and thus has no evidence of what the clerk rings up. (No scanning equipment is used.)

Receipts are allowed to remain on the cash register in a continuous strip unless a customer requests that their receipt be torn from the register.

Situation 3: Better Bath Wear Company hires people based solely on an interview with the store manager.

Situation 4: The individual who is responsible for writing the checks to pay bills for Seafin Seafoods is also the employee who prepares the monthly bank reconciliation.

Instructions

For each situation, identify the internal control principle being violated and briefly describe the risk inherent in the existing circumstances.

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