161.
162. You began your new job as the accountant for Morton Company. You were surprised to find that the company had a $2,000 petty cash fund, which sits in the break room. The President of the company told you: “Our petty cash system here works quite smoothly. Since everyone is honest here, everyone has access to the fund for incidentals that might pop up in the course of the business day. Most of these situations don’t have any receipts tied to them, so I just put the money back in the fund when my secretary tells me that we have run out and debit the amount to Miscellaneous Expense.”
Required:
(a) Should you implement some controls on petty cash? Why?
(b) If so, what controls could be used for petty cash?
a.Even though the President thinks the petty cash system works well, $2,000 is a tempting sum for theft. Even with only $2,000, if the fund is replenished frequently, a significant amount of cash could be stolen. For example, if the fund is replenished weekly, then $104,000 ($2,000 ´ 52 weeks) could be subject to theft. The issue of debiting the amount used to Miscellaneous Expense is a questionable practice that would typically be flagged by the independent auditor.
b.Controls for petty cash include (1) designating one person who is responsible for the fund, (2) maintaining a written record of all payments, (3) requiring support (receipts) for payments from the fund, and (4) periodic review of the funds on hand and the payments by an independent person.
163. Why would a bank require a company to maintain a compensating balance?