Reference no: EM132693820

Mr. C is the trusted accountant of Shah Construction Company, found himself in a personal financial difficulties and decided to borrow (steal) 3000 from the company and to conceal his theft:

• His first step was to remove 3000 in currency from cash register (Journal). This amount represented the bulk of the cash received in over the counter sale during the three business days since the last bank deposit. Mr. C then removed a 3000 check from the day's income mail; this check has been mailed by the customer, Mr. A in full payment of his account. Mr. C made no journal entry to record the 3000 collection from Mr. A, but deposited the check in Shah Construction company account in place of the 3000 over-the counter cash receipts he has stolen.

• In order to keep Mr. C from protesting when his month end statement reached him, Mr. A made a journal entry debiting sales returns and Allowances and crediting Accounts Receivable Mr. C. Mr. A posted this entry to the ledger accounts affected and to Mr.C account in the subsidiary ledger for account receivable.

Required:

Question 1. Did these actions by Mr. A cause the ledger to be out of balance or the subsidiary ledger to disagree with the controlling account? Explain.

Question 2. Assume that Shah Construction Company prepares financial statements at the end of the month without discovering the theft. Would any item in the balance sheet or the income statement be in error? Explain.

Question 3. Several weaknesses in internal control apparently exist Mr. Shah Company. Indicate three specific changes needed to strengthen internal control over cash receipts.