Questions: Pennington Company has the following internal control procedures over cash disbursements. Identify the internal control principle that is applicable to each procedure. a. Company checks are prenumbered. b. The bank statement is reconciled monthly by an internal auditor. c. Blank checks are stored in a safe in the treasurer's office. d. Only the treasurer or assistant treasurer may sign checks. e. Check-signers are not allowed to record cash disbursement transactions.

Pennington Company has the following internal control procedures over cash disbursements. Identify the internal control principle that is applicable to each procedure. a. Company checks are prenumbered. b. The bank statement is reconciled monthly by an internal auditor. c. Blank checks are stored in a safe in the treasurer's office. d. Only the treasurer or assistant treasurer may sign checks. e. Check-signers are not allowed to record cash disbursement transactions.
Transcript text: Pennington Company has the following internal control procedures over cash disbursements. Identify the internal control principle that is applicable to each procedure. a. Company checks are prenumbered. b. The bank statement is reconciled monthly by an internal auditor. $\square$ c. Blank checks are stored in a safe in the treasurer's office. $\square$ d. Only the treasurer or assistant treasurer may sign checks. $\square$ e. Check-signers are not allowed to record cash disbursement transactions. $\square$
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Solution

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The question involves identifying the internal control principles applicable to each procedure related to cash disbursements at Pennington Company. Here are the principles matched with each procedure:

a. Company checks are prenumbered.

  • Internal Control Principle: Documentation Procedures
  • Explanation: Prenumbering checks helps ensure that all checks are accounted for and can be tracked, preventing unauthorized or duplicate payments.

b. The bank statement is reconciled monthly by an internal auditor.

  • Internal Control Principle: Independent Internal Verification
  • Explanation: Having an internal auditor reconcile the bank statement ensures an independent review of the transactions, which helps detect errors or irregularities.

c. Blank checks are stored in a safe in the treasurer's office.

  • Internal Control Principle: Physical Controls
  • Explanation: Storing blank checks in a safe limits access to them, reducing the risk of theft or unauthorized use.

d. Only the treasurer or assistant treasurer may sign checks.

  • Internal Control Principle: Establishment of Responsibility
  • Explanation: Assigning check-signing authority to specific individuals ensures that only authorized personnel can approve disbursements, enhancing accountability.

e. Check-signers are not allowed to record cash disbursement transactions.

  • Internal Control Principle: Segregation of Duties
  • Explanation: Separating the responsibilities of signing checks and recording transactions helps prevent fraud and errors by ensuring that no single individual has control over all aspects of a financial transaction.

By applying these internal control principles, Pennington Company can enhance the security and accuracy of its cash disbursement processes.

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