Apply the use of internal controls to the scenario below, then respond to the questions that follow:
Ted Jones owns rental properties in Texas. Each property has a property manager, who collects the rent once per month, arranges for repairs to the property; and assists with advertising of other available properties. The property manager initiates a monthly transfer of cash to Jones each month and prepares the bank reconciliation themselves.
The property manager, however, has been slowly stealing money from the company. To cover their tracks, the amount of checks outstanding is underestimated on the bank reconciliation each month. Because of this, each monthly bank reconciliation appears to be out of balance; while the balance sheet reports more cash than is in the bank. Meanwhile, Ted Jones is in the process of trying to sell his property management company; therefore, the balance sheet must be presented to potential investors
Respond to the questions below:
What is the purpose of a bank reconciliation?
What type of internal controls must be put in place to avoid this type of theft?
How may the incorrect balance sheet adversely affect the sale of the business? In other words, how might this error harm Jones and the potential investors?