Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
CHAPTER 7
Internal Control and Cash
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Brief
Problems
Questions Exercises Exercises Set A
1. Explain the activities that help 1, 2, 3, 4,
prevent fraud and achieve
5, 6, 7
internal control.
2. Apply control activities to
cash receipts and cash
payments.
1
8, 9, 10,
2, 3, 4, 5
11, 12, 13,
14, 15
1, 2, 3, 5
P7-1A
P7-2A
P7-3A
3, 4, 5
P7-1A
P7-2A
P7-3A
6
P7-4A
3. Describe the control features 16
of a bank account.
4. Report cash on the balance
sheet.
17, 18
6, 7
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ASSIGNMENT CHARACTERISTICS TABLE
Problem
Description
Number
1A
Identify internal control activities related to cash
receipts.
2A
Identify internal controls weaknesses for cash receipts
and cash payments.
3A
Identify internal controls for cash receipts and cash
payments.
4A
Calculate cash balance and report other items.
Difficulty
Level
Time
Allotted (min.)
Moderate
25-35
Moderate
25-35
Simple
25-35
Moderate
20-30
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material
1.
Study Objective
Explain the activities that
help achieve internal
control.
Knowledge
Q7-1
Q7-2
Q7-4
2.
Apply control activities to
cash receipts and cash
payments.
4.
Describe the control
Q7-176
features of a bank account.
5.
Report cash on the balance
sheet.
Broadening Your Perspective
Comprehension
Application
Q7-3
P7-1A E7-5
Q7-5
P7-2A
Q7-6
P7-3A
Q7-7
BE7-1
E7-1
E7-2
E7-3
Q7-8
Q7-9
Q7-10
Q7-11
Q7-12
Q7-13
Q7-14
Q7-15
BE7-2
BE7-4
E7-3
Q7-17
Q7-18
BE7-7
P7-1A
P7-2A
P7-3A
Analysis
Synthesis Evaluation
BE7-2
BE7-3
BE7-5
E7-4
E7-5
BE7-6
E7-6
BYP7-1
BYP7-2
P7-4A
Continuing
Cookie
Chronicle
BYP7-3
BYP7-4
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ANSWERS TO QUESTIONS
1.
The three primary factors that contribute to employee fraud are: opportunity,
financial pressure and rationalization. The opportunity to commit fraud
exists when there is a lack of controls to deter and detect fraud. Financial
pressures, experienced in the personal lives of employees, provide an
incentive or a need to use fraud to alleviate these pressures. Finally,
rationalization is a technique whereby the employee committing the fraud
justifies his or her fraudulent behaviour.
2.
The five components of good internal control include:
(a)
Control environment: Management sets the “tone at the top” by
communicating to all members of the organization what behaviour is
expected and enforcing the rules of conduct.
(b)
Risk assessment: Companies must identify and analyze the various
factors that create risk for the business and must determine how to
manage these risks.
(c)
Control activities: Management must design policies and procedures
to address the specific risks faced by the company in order to reduce
the occurrence of fraud and honest errors.
(d)
Information and communication: The internal control system must
identify, collect, and communicate all relevant information to the
appropriate internal and external parties.
(e)
Monitoring: Monitoring involves identifying problems and reporting
them to appropriate levels of the organization where action can be
taken.
3.
Agree. Internal control is the process designed and implemented by
management to help an organization achieve (1) reliable financial reporting,
(2) effective and efficient operations, and (3) compliance with relevant laws
and regulations. Through the implementation of internal control, the
efficiency of the operations will be improved.
4.
An essential control activity is to make specific employees responsible for
specific tasks. When all clerks make change out of the same cash register
drawer this is a violation of establishing responsibility. In this case, each
sales clerk should have a separate cash register, cash drawer, or password
with pre- and post-shift counts.
5.
Independent checks of performance are necessary even if the proper
segregation of duties is in place. This procedure is used to ensure that the
segregation of duties, and other, control procedures are being correctly
followed and working effectively. For example, the accounting records are
compared with existing assets or with external sources of information.
Problems or changes can be addressed immediately to restore the proper
controls and ensure the compliance with the business’s policies and
procedures.
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QUESTIONS (Continued)
6.
Documentation procedures provide evidence of the occurrence of
transactions and events. Many documents used in an organization require
prenumbering and accounting for the numerical sequence of these
documents. An example is the use of prenumbered cheques used for
payments. Checking the numerical sequence of used and recorded
prenumbered documents helps to ensure that a transaction is not recorded
more than once or not at all.
7.
A company’s system of internal control can only give reasonable assurance
that assets are properly safeguarded and that accounting records are
reliable. The concept of reasonable assurance is based on the belief that
the cost of control activities should not be more than their expected benefit.
Ordinarily, a system of internal control provides reasonable but not
absolute, assurance. Absolute assurance would be too costly.
The human element is an important factor in a system of internal control. A
good system may become ineffective through employee fatigue,
carelessness, and indifference. Moreover, internal control may become
ineffective as a result of collusion.
8.
Sales using debit cards and bank credit cards are both considered cash
transactions to retailers. Banks usually charge the retailer a transaction fee
for each debit card transaction and a fee that is a percentage of the credit
card sale. In both types of transactions, the retailer’s bank will wait until the
end of the day and make a deposit for the full day’s transactions. Fees for
bank credit cards are generally higher than debit card fees.
Debit cards allow customers to spend only what is in their bank account
whereas a bank credit card gives the customer access to money made
available by a bank or other financial institution (similar to a short-term loan).
9.
At the end of a day (or shift) the cashier should count the cash in the cash
register, record the amount, and turn over the cash and the record of the
amount to either a supervisor or the person responsible for making the bank
deposit. Exact procedures will be different in every company, but the basic
principles should be the same. The person or persons who handle the cash
and make the bank deposit should not have access to the cash register
tapes or the accounting records. The cash register tapes should be used in
creating the journal entries in the accounting records. An independent
person who does not handle the cash should make sure that the amount
deposited at the bank agrees with the cash register tapes and the
accounting records.
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QUESTIONS (Continued)
10.
Cash registers with scanners are readily visible to the customer. Thus, they
prevent the sales clerk from ringing up or scanning in a lower amount and
pocketing the difference. In addition, the customer receives an itemized
receipt, and the store’s cash register tape is locked into the register for
further verification.
11.
All mail-in receipts in the form of cheques are generally accompanied by a
remittance slip. The envelopes should be opened in the presence of two
mail clerks. The amount of the remittance slip and the amount of the cheque
should be compared to establish any discrepancies. Each cheque should
be promptly stamped “For Deposit Only”. The remittance slips are sent to
the accounting department for recording and the cheques are sent to the
person responsible for making the bank deposits. Persons handling the
cheques must not be able to alter the accounting records. An independent
person should compare the deposit recorded by the bank with the amount
recorded in the accounting records. In a small company, where it is not
possible to have the necessary segregation of duties, the owner should be
responsible for cash receipts.
12.
Sanjeet’s argument is flawed for this reason: Although internal controls for
handling electronic funds transfers (EFTs) are different from those for
handling cash and cheques, they nevertheless include proper authorization
and segregation of duties to ensure an employee cannot divert a customer
payment to a personal bank account and then cover it up through fraudulent
accounting entries.
13.
Payment by cheque or electronic funds transfer contributes to effective
internal control over cash payments. Prenumbered cheques help to ensure
that all payments are accounted for. In addition, the bank provides a double
record of the cash payments, and safekeeping of the cash until paid.
However, effective control is also possible when small payments are made
from a petty cash fund.
14.
This statement is incorrect. The use of EFT for cash payments will result in
better internal control as long as there is proper authorization and
segregation of duties. EFT payments also reduce the costs involved in
making payments by cheque, such as postage and envelope costs. Costs
are not necessarily reduced by eliminating or reducing internal control
procedures.
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QUESTIONS (Continued)
15.
Wanda could potentially commit a fraud by:
(1) falsifying a receiving report and approving payment to a nonexistent
supplier. She could open a bank account in the name of the nonexistent
supplier and deposit the payments in this account, allowing her to steal
cash from Walter’s Watches.
(2) ordering merchandise and stealing the inventory. She could cover her
theft by falsifying the receiving reports and approving the payment to
the supplier even though the goods are not in the store.
Instructor’s note: These are only two examples. Students may develop other
valid examples.
16.
A company’s internal control is improved with the use of a bank account in
the following ways:
(a) Physical control and restricted access over cash is more easily
maintained through the security and access controls provided by the
banking system.
(b) The banking system provides a duplicate record of the transactions
affecting cash that are recorded in the company accounting records.
(c) Endorsements of cheques by the payees provide proof of payment that
is invaluable in the case of disputes.
(d) Most banks offer overnight deposit facilities that secure cash until the
deposits are processed, thereby discouraging robberies at the
company locations and providing for better security for company
employees.
(e) Fast and efficient updates of cash transactions provide management
with real time information that avoid mistakes and clear up inquiries
through on line access to banking activity.
(f) Based on the company policies, the bank will enforce company policy
by allowing only authorized employees to sign cheques or have access
to banking information.
17.
Disagree. The credit balance in the cash account does not mean there is
an error in the account. It is possible for the cash account to have a credit
balance to reflect a cash deficit or negative position. This situation can occur
assuming the businesses’ bank allows an overdraft position which is in
effect, a temporary bank loan.
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QUESTIONS (Continued)
18.
Cash equivalents are short-term, highly liquid (easily sold) investments that
are not subject to significant risk of changes in value. They typically have
maturities of three months or less from the date they are purchased. Cash
equivalents are sometimes combined with cash on the balance sheet.
A company may have cash that is not available for general use because it
is restricted for a special purpose. If the restricted cash is expected to be
used within the next year, the amount should be reported as a current
asset. When restricted funds will not be used in that time, they should be
reported as a noncurrent asset.
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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 7-1
The six control activities include:
1.
Establishment of responsibility: This control activity
involves assigning a task to one employee and making that
employee accountable for the task assigned. An example
would be assigning the responsibility to a cashier who is in
charge of taking in cash, using a cash register and making
change when collecting parking fees.
2.
Segregation of duties: This activity involves assigning task
to different individuals to prevent fraud or errors. An
example would be to separate the responsibility of handling
the cash from the record keeping of the parking fee revenue.
3.
Documentation procedures: This control activity provides
evidence of the transactions and events that have taken
place. This is particularly important when an employee is
handling cash. For Liberty Parking, when parking tickets are
issued giving customers parking access, the tickets should
be prenumbered.
4.
Physical and IT controls: These include mechanical and
electronic controls to safeguard (protect) assets and
improve the accuracy and reliability of the accounting
records. An example for the parking garage would be
barriers or gates for entering and exiting the parking lot.
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BRIEF EXERCISE 7-1 (Continued)
5.
Independent checks of performance: This control involves
the verification by an independent person that the control
activities are being followed. An example would be to have
a supervisor observe how the cashier is handling the
collection and recording of the cash using the cash register.
6.
Human resource controls: These controls involve
protection against employee fraudulent behaviour. The
parking garage should conduct thorough background
checks before hiring the parking lot cashier.
BRIEF EXERCISE 7-2
1.
2.
3.
4.
5.
6.
Human resource controls
Physical and IT controls
Independent checks of performance
Segregation of duties
Documentation procedures
Establishment of responsibility
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BRIEF EXERCISE 7-3
Credit Card (Visa)
April 9
Cash ..................................................
Credit Card Expense ($175 × 4%) ...
Sales .............................................
168
7
Kopper Kettle Credit Card
April 9
Accounts Receivable .......................
Sales .............................................
175
Debit Card
April 9
Cash ..................................................
Debit Card Expense .........................
Sales .............................................
173
2
175
175
175
BRIEF EXERCISE 7-4
1.
2.
3.
4.
5.
6.
Documentation procedures
Physical and IT controls
Human resource controls
Independent checks of performance
Establishment of responsibility
Segregation of duties
BRIEF EXERCISE 7-5
Internal Review only
External Review only
Both (intersection of
Venn diagram)
1, 3, 5
2, 4
6
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
BRIEF EXERCISE 7-6
Cash and cash equivalents should be reported at $19,750 ($5,500
+ $750 + $10,000 + 3,500).
The cash refund due from CRA is a receivable. Staledated
cheques cannot be used, so the corresponding accounts
receivable remains outstanding. Postdated cheques are
receivables until they can be cashed on their valid date.
The Treasury bill is a short-term investment of less than 90 days
and may be considered a cash equivalent.
BRIEF EXERCISE 7-7
Current Assets:
Dupré Company should report the cash in bank, payroll bank,
store cash floats, and petty cash as cash on its balance sheet.
The investments with original maturity dates of fewer than 90
days may be grouped with cash as cash and cash equivalents.
The short-term investments with maturity dates of 100 to 365
days should be reported as a separate item.
Noncurrent Assets:
The Plant Expansion Fund Cash should be reported as a
noncurrent asset, assuming the fund is not expected to be used
during the next year.
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SOLUTIONS TO EXERCISES
EXERCISE 7-1
(a)
A dishonest store employee can steal from Discount Toys
without getting caught by filling out a pre-numbered return
form with all of the necessary information to pretend that a
return of goods has occurred and pocket the cash. The
employee need not have any merchandise, nor does he
have to collude with any other employee for the fraud to
occur without detection.
(b)
In order to avoid the fraud described in (a) above, Discount
Toys should insist on the following procedures concerning
returns:
1. Insist that cash register receipts must be attached to the
pre-numbered return form as proof of the original
purchase.
2. The original cash register receipt should have the return
entered on it to ensure that the receipt cannot be used
for an additional refund.
3. Have the customer fill out a form with their name and
telephone number where they can be reached and do a
spot check later in the day to verify that the customer
did in fact request a refund that day.
4. Have a supervisor approve the return in the presence of
the customer, to verify that the return is valid and that
merchandise was in fact obtained from the customer.
5. The cashier should be instructed to refund the customer
only if an approved return was obtained by the
customer. Cash should not be handed out by the
employee filling out the return form.
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EXERCISE 7-1 (Continued)
(b) (Continued)
6. The refund should be in the same manner as the original
payment. Credit and debit card purchases should be
refunded to the same credit and debit card. Cash
refunds should be made only for cash purchases.
7. Management should not allow the employee handing
returns to have access to inventory. The returned
merchandise should not be placed back on the shelf
immediately. Returned merchandise should be set
aside. At the end of the day, another employee should
be charged with the duty of matching the merchandise
returned to the duplicate return slips to ensure that
employees are not creating fictitious return forms, or
without any merchandise being provided. The matching
procedure will prevent the employee preparing the
duplicate return slip from entering items of greater
value, as a favour to a friend.
8. Accounting personnel should account for the numerical
sequence of duplicate return slips. When accounting for
the slips, they should apply some scrutiny to the
information on the slips and ensure that the proper
approval has been documented by the supervisor.
Unusual amounts and frequency of returns should be
reported and followed up with the general manager.
9. The general manager of the store should supervise the
employees performing the return procedures to ensure
that the controls are working effectively.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
EXERCISE 7-2
(a) Weakness or Strength
1. No establishment of
responsibility over the
cash—weakness
(b) Suggested Improvements
The employees should use
separate cash drawers.
Cash counts not performed
independently—weakness
Cash counts should be performed
by a supervisor at the end of the
shift and the totals compared to
the cash register tape.
2.
Improper segregation of
duties could result in the
misappropriation of cash—
weakness
Different individuals should
receive cash, record cash receipts
and deposit the cash. In a small
business this may be impossible;
therefore, it is imperative that
management take an active role in
the operations of the business so
to be able to detect any
accounting irregularities.
3.
Improper segregation of
duties—weakness.
The same individual could omit
the documentation of a purchase
order, receive a shipment and
take the merchandise, all without
a trace. Implement segregation of
duties to prevent the
misappropriation (loss) of assets.
4.
Repair of physical
controls—strength.
5.
Internal reviews completed
regularly and issues
resolved—strength.
6.
Human resources control
over employees’ duties
including vacations—
strength except for the
controller position.
Apply the policy of replacing the
position during vacations to the
controller position.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
EXERCISE 7-3
1.
2.
3.
4.
(a)
Access to cash is not restricted. Cash is not placed in
a secure device until deposited. The locked metal box
being used is likely portable and not secure. The
control activity that is being violated is the physical
and IT control.
(b)
The excess cash should be stored in a secure storage
device such as a safe with no access possible by the
employees.
(a)
The responsibility for the cash drawer is not assigned
a single employee. Follow up and control over cash
shortages is compromised. The control activity that is
being violated is the establishment of responsibilities.
(b)
If several employees need to share the same cash
drawer to ring up sales, each employee should be
assigned an access code that is tracked by the cash
register for each transaction. Any cash shortages or
entry errors can be narrowed down to a particular
employee using the access code.
(a)
All employees handling cash should be bonded.
Failing to do so violates the human resource control.
Cash shortages through fraud may not be recoverable
from insurance.
(b)
Bond all employees handling cash.
(a)
Improper segregation of duties has been established
leaving the possibility of the misappropriation of
company assets by the assistant controller. The
control activity violated is the segregation of duties.
(b)
Reassign the duties such that anyone having access
to cash does not also have access to the accounting
records.
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EXERCISE 7-3 (Continued)
5.
(a)
Destroying the remittance advices and credit card
sales receipts weekly exposes the business to the risk
of not being able to substantiate a claim against a
customer. The control activity violated is the
documentation procedures.
(b)
Obtain adequate storage space and eliminate the
weekly destruction of the documents.
EXERCISE 7-4
Mar. 15 Cash ($5,814 − $11) ...................
Debit Card Expense
($0.25 × 44) ............................
Sales ......................................
5,803
(b) June 21 Cash ($2,400 − $66) ...................
Credit Card Expense
($2,400 × 2.75%) ....................
Sales ......................................
2,334
(a)
11
5,814
66
2,400
July 17 No entry
(c)
Oct.
7 Accounts Receivable—Ramos .
Sales ......................................
Nov. 10 Cash ...........................................
Accounts Receivable—Ramos
595
595
595
595
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EXERCISE 7-5
1.
2.
3.
(a)
Company cheques are not prenumbered and access
to blank cheques is not restricted, leaving the
possibility for someone to make an unauthorized
payment from the business bank account which may
go undetected. Payment transactions may also remain
unrecorded in the accounting records. The control
activities that are being violated are the
documentation and physical and IT controls.
(b)
Obtain prenumbered cheques and account for their
numerical sequence. Store the unused cheques in a
secure area.
(a)
Improper segregation of duties because only one
employee is signing cheques.
(b)
Require two employees to sign each cheque. In this
situation, it would be appropriate to have only one
person sign the cheques only if it was the owner.
(a)
Improper segregation of duties has been established
leaving the possibility of the misappropriation of
company assets by having a supplier paid for goods
which have not been ordered or received. As well, the
purchasing agent can direct merchandise to be
delivered to a location other than the company’s place
of business. The control activities violated are
establishment of responsibility and the segregation of
duties.
(b)
Reassign the duties such that anyone having access
to inventory is not assigned the duty of authorizing
payments. As well, purchasing agents should be
restricted from having access to the inventory.
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EXERCISE 7-5 (Continued)
4.
5.
6.
7.
(a)
Improper segregation of duties has been established
leaving the possibility of the misappropriation of
company assets by having an unsupported payment
or a payment that is not a business expense. Duplicate
payments can be achieved by failing to stamp the
invoice as having been paid. The control activities
violated are establishment of responsibility and the
segregation of duties.
(b)
Reassign the duties such that anyone having signing
authority on the bank account does not have record
keeping duties or the task of stamping invoices paid.
(a)
The control activity violated is human resource
controls. Individuals placed in a position of trust could
misappropriate company assets.
(b)
Perform thorough background checks.
(a)
The control activity violated is human resource
controls.
The
purchasing
agent
may
be
misappropriating company assets.
(b)
Insist that all personnel take scheduled vacation and
have their positions staffed during their absence.
(a)
The control activity violated is human resource
controls. The controller may be misappropriating
company assets.
(b)
Insist that all personnel, including the controller, take
scheduled vacation for full week periods, not just one
day per week, and have their positions staffed during
their absence.
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EXERCISE 7-6
(a)
Cash balance June 30, 2014
1. Currency and coin .............................................
2. Guaranteed investment certificate ...................
3. June cheques.....................................................
5. Royal Bank chequing account ..........................
6. Royal Bank savings account ............................
9. Cash register floats ...........................................
10. Over-the-counter cash receipts for April 30:
Currency and coin.........................................
Cheques from customers .............................
Debit card slips .............................................
Bank credit card slips ...................................
Total ....................................................................
$ 79
12,000
300
2,500
4,250
300
570
130
580
750
$21,459
(b)
2. Note: the Guaranteed investment certificate could be
reported as a short-term investment on the balance
sheet instead of as a cash equivalent. If it was reported
as a short-term investment then the balance sheet
would show Cash of $12,459.
4. Postdated cheque—Balance sheet (accounts receivable)
7. Prepaid postage in postage meter—Balance sheet
(prepaid expense)
8. IOU from company receptionist—Balance sheet (other
receivables)
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
SOLUTIONS TO PROBLEMS
PROBLEM 7-1A
Activities
Application to Cash Receipts
Establishment of
responsibility
Only cashiers are authorized to sell
tickets. Only the manager and
cashier can handle cash. Only the
manager has access to unlocked
rolls of tickets.
Segregation of
duties
The duties of receiving cash and
admitting customers are assigned to
the cashier and to the usher. The
manager maintains custody of the
cash, and the company accountant
records the cash.
Documentation
procedures
Tickets are prenumbered. Cash
count sheets are prepared. Deposit
slips are prepared. Copies are used
for verification and recording.
Physical
controls
and
IT
A safe is used for the storage of cash
and a machine is used to issue
tickets.
Performance
reviews
Cash counts are made by the
manager at the end of each cashier's
shift. Daily comparisons are made by
the company controller.
Other controls
Cashiers are bonded.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
PROBLEM 7-1A (Continued)
Taking It Further:
Actions by the usher and cashier to misappropriate cash could
include:
(1) Instead of tearing the tickets, the usher could return the
tickets to the cashier who could resell them, and the two
could divide the cash.
(2) The cashier could issue a less expensive ticket than paid
for, and the usher would admit the customer. The
difference between the ticket issued and the cash
received could be divided between the usher and
cashier.
(3) The cashier and usher could agree to let friends into the
theatre at no cost (or in exchange for an "under the table"
payment).
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
PROBLEM 7-2A
(a) Weaknesses & (b) Problems
1. No segregation of duties
between receiving the cash
and admitting students to the
lessons. The teachers could
admit students for free or
charge extra and pocket the
difference or report fewer
students and pocket the extra
money.
Taking It Further:
Suggested Improvements
The duties of receiving cash and
admitting students should be
assigned to separate individuals.
2. No segregation of duties in
the accounting functions. The
general manager could prepare fictitious invoices for
payment and it would not be
detected.
An independent person should
approve the invoices for payment
and prepare the bank
reconciliations.
3. No segregation of duties.
Sales persons are responsible
for determining credit policies
and they receive a
commission based on sales.
They could provide credit to a
bad credit risk customer in
order to receive the
commission on the sale.
An independent person should
be responsible for providing
credit to customers.
Alternatively, a policy could be
implemented where salespeople
are only paid a commission on
sales that are collected. This
would reduce motivation to make
sales to financially weak
customers.
4. No establishment of
responsibility. No individual is
solely responsible for the
accounting software. All
programmers have access to
the accounting software
which could provide
unauthorized changes to the
accounting records.
Access to the accounting
records should be restricted and
protected with password or
biometric restrictions.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
PROBLEM 7-2A (Continued)
5. Documentation is lacking.
Receiving and purchase
orders have been eliminated
which could result in
unauthorized purchases
and/or receipts or fictitious
invoices being paid, since no
support is required. An
employee could set up a bank
account and collect the
payment.
Receiving reports and purchase
orders should be reinstated.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
PROBLEM 7-3A
Roger has created a situation that leaves many opportunities for
undetected fraud. Here is a list of some of the deficiencies in
internal control. You may find others.
1.
Establishment of responsibility
(a) Inadequate control over the cash box. In effect, it was
operated like a petty cash fund, but too many people had
the key.
(b) Roger should have had the key and dispersed funds when
necessary for purchases.
2.
Segregation of duties
(a) Freda Stevens counted the funds, made out the deposit
slip, and took the funds to the bank. This made it possible
for Freda to take some of the money and deposit the rest
since there was no external check on her work.
(b) Roger should have counted the funds, with someone
observing him. Then he could have made out the deposit
slip and had Freda deposit the funds.
(a) Sara Billings was collecting tickets and receiving cash for
additional tickets sold.
(b) There should have been one person selling tickets at the
door and a second person collecting tickets.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
PROBLEM 7-3A (Continued)
3.
Documentation procedures
(a) The tickets were unnumbered.
(b) By numbering the tickets, the students could have been
held more accountable for the tickets.
(a) No record was kept of which students took tickets to sell
or how many they took.
(b) In combination with items 1 and 2 above, the student
assigned control over the tickets should have kept a
record of which tickets were issued to each student for
resale. (Note: This problem could have been largely
avoided if the tickets had been sold at the door on the day
of the dance.)
(a) There was no control over unsold tickets. This deficiency
made it possible for students to sell tickets, keep the cash,
and tell Roger that they had disposed of the unsold tickets.
(b) Students should have been required to return the unsold
tickets to the student maintaining control over tickets, and
the cash to Roger. In each case, the students should have
been issued a receipt for the cash they turned in and the
tickets they returned.
(a) Instead of receipts, students simply wrote notes saying
how they used the funds.
(b) A requirement to provide a valid receipt should have been
put in place.
(a) A receipt was not received from Attitude Al. Without a
receipt, there is no way to verify how much Attitude Al was
actually paid. For example, it is possible that he was only
paid $100 and that Roger took the rest.
(b) If the payment has to be done in cash, Attitude Al should
be required to sign that the receipt, confirming that he has
received the payment.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
PROBLEM 7-3A (Continued)
4.
Physical and IT controls
(a) The tickets were left in an unlocked box on his desk.
(b) Roger should have assigned control of the tickets to one
individual, and kept the tickets in a locked box over which
that student alone had control.
5.
Independent checks of performance
(a) No verification of the number of students attending the
event was established.
(b) A count of the number of people attending the event
should have taken place when admission was granted.
This total could then have been compared to the sales
proceeds to determine that all ticket sales have been
properly accounted for and cash obtained.
6.
Human resource controls
None apply in this case
Taking It Further:
Designing and implementing a strong system of internal control
can help protect students and their teacher from being falsely
accused of fraud. The instincts of Principal Skinner are correct,
when it didn’t appear reasonable to him that only $430 in cash
would be left from an event generating roughly $2,000 in sales.
His suspicions could lead to false fraud accusations directed to
anyone involved in organizing the event. Had proof been required
to explain this unreasonable result, it would have been very
difficult for Roger or the students to defend themselves. Bad
feelings between the students and the teacher could develop
from suspicions concerning who had perpetrated the fraud.
Roger and the SRC students had done the work on a volunteer
basis and for a good cause. If they feel they have been suspected
of fraud, they will likely not volunteer in the future.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
PROBLEM 7-4A
(a) Cash and cash equivalents:
1. Cash on hand ....................................................
2. Petty cash fund .................................................
3. Chequing account ............................................
US bank account ..............................................
7. Treasury bills ....................................................
Total ..............................................................
(b) 2.
$
500
125
24,500
16,000
25,000
$66,125
The petty cash fund should have been replenished at
year-end. Since this has not happened, the company
must record the petty cash expenses and reduce petty
cash by $175. Once the petty cash fund is reimbursed,
$300 cash will be available once again.
4. The overdraft protection for $10,000 on the chequing
account would not be reported on the balance sheet. It
may be disclosed in the notes to the financial
statements.
5.
Access to the $4,250 is restricted to a specific purpose
and should be reported as restricted cash, reported as
a current or noncurrent asset, depending on the when
the leases expire.
6. Post dated cheques are not assets. The amount would
be part of the Accounts Receivable balance.
7. Short-term investments with original maturity dates
greater than 90 days (shares and guaranteed investment
certificate) would be listed separately in the current
asset section.
8. The owner’s personal bank account is not an asset of the
business.
9. NSF cheques would be included in Accounts Receivable,
assuming the company expects collection.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
PROBLEM 7-4A (Continued)
Taking It Further:
It is important to present restricted cash separately from cash on
the balance sheet so that creditors and other users of the
financial statements realize that the restricted amounts are not
available for the everyday payments required by the business in
normal operations.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
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