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Ch07- Kieso financial accounting solution manual

Ch07 - Chapter 07 solution for Financial Accounting by Donald E. Kieso, Jerry J.

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CHAPTER 7

Fraud, Internal Control, and Cash

ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives Questions

Brief Exercises Do It! Exercises Problems

Define fraud and the principles of internal control.

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11

1, 2, 3, 4 1 1, 2, 3, 5, 6

1, 2, 7

Apply internal control principles to cash.

6, 12, 13, 14 , 15, 16, 17 , 18, 2 0

5, 6, 7, 8, 9 2a , 2b 2, 3, 4, 5, 6, 7, 8

1, 2, 3, 7

Identify the control features of a bank account.

19, 21, 22, 23 10, 11, 12 13, 14, 15

3 9, 10, 11, 12, 13

4, 5, 6, 7

Explain the reporting of cash.

24, 25 , 26 16 4 14, 15

ASSIGNMENT CHARACTERISTICS TABLE

Problem Number Description

Difficulty Level

Time Allotted (min.)

1 Identify internal control principles over cash disbursements. Simple 20 – 30

2 Identify internal control weaknesses in cash receipts and cash disbursements.

Moderate 35 – 45

3 Journalize and post petty cash fund transactions. Simple 20 – 30

4 Prepare a bank reconciliation and adjusting entries. Moderate 20 – 30

5 Prepare a bank reconciliation and adjusting entries from detailed data.

Moderate 40 – 50

6 Prepare a bank reconciliation and adjusting entries. Moderate 30 – 40

7 Prepare a comprehensive bank reconciliation with theft and internal control deficiencies.

Complex 35 – 45

FRAUD, INTERNAL CONTROL, AND CASH (Continued)

ANSWERS TO QUESTIONS

Fraud is dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. An example of fraud that might occur at a bank would be a computer operator embezzling funds by transferring a customer’s deposits into another account.
The three main factors that contribute to employee fraud are opportunity, financial pressure, and rationalization. Opportunities that an employee can take advantage of occur when the workplace lacks sufficient controls to deter and detect fraud. Financial pressure occurs when employees want to lead a lifestyle that they cannot afford on their current salary. Rationalization involves employees justifying fraud because they believe they are underpaid while their employer is making lots of money.
The five components of a good internal control system are: (1) A control environment, (2) Risk assessment, (3) Control activities, (4) Information and communication, and (5) Monitoring.  A control environment. Top management must make it clear that the organization values integrity and that unethical activity will not be tolerated.  Risk assessment. Companies must identify and analyze the various factors that create risk for the business and must determine how to manage these risks.  Control activities. To reduce the occurrence of fraud, management must design policies and procedures to address the specific risks faced by the company.  Information and communication. The internal control system must capture and communicate all pertinent information both down and up the organization, as well as communicate information to appropriate external parties.  Monitoring. Internal control systems must be monitored periodically for their adequacy. Significant deficiencies need to be reported to top management and/or the board of directors.
Disagree. Internal control is also concerned with the safeguarding of company assets from employee theft, robbery, and unauthorized use.
The principles of internal control are: (a) establishment of responsibility, (b) segregation of duties, (c) documentation procedures, (d) physical controls, (e) independent internal verification, and (f) human resource controls.
This is a violation of the internal control principle of establishing responsibility. In this case, each sales clerk should have a separate cash register or cash register drawer.
The two applications of segregation of duties are: (1) Different individuals should be responsible for related activities. (2) Responsibility for the recordkeeping for an asset should be separate from the physical custody of that asset.
Documentation procedures contribute to good internal control by providing evidence that transac- tions and events have occurred and, when signatures (or initials) are added, the documents establish responsibility for the transactions. The prompt transmittal of documents to accounting contributes to recording transactions in the proper period, and the prenumbering of documents helps to ensure that a transaction is not recorded more than once or not at all. Questions Chapter 7 (Continued)

Questions Chapter 7 (Continued)

Physical controls apply to cash disbursements when: (a) blank checks are stored in a safe, and access to the safe is restricted to authorized personnel, and (b) a checkwriting machine and indelible ink are used to imprint amounts on checks. Human resource controls include: (a) bonding employees who handle cash disbursements, (b) requiring employees disbursing cash to take vacations, and (c) conducting background checks on employees who will be disbursing cash.
(a) A voucher system is a network of approvals by authorized individuals acting independently to ensure that all disbursements by check are proper. (b) The internal control principles applicable to a voucher system are: (1) establishment of res- ponsibility, (2) segregation of duties, (3) independent internal verification, and (4) documentation procedures.
Electronic funds transfer is a cash disbursement system that uses wire, telephone, or computers to transfer cash balances from one location to another.
The activities in a petty cash system and the related principles are:

(a) (1) Establishing the fund. * Establishment of responsibility for custody of fund. (2) Making payments from the fund. * Documentation procedures because the custodian must use a prenumbered petty cash receipt. (3) Replenishing the fund. * Independent internal verification because the re- quest for replenishment must be approved before the check is written.

(b) Journal entries are required for a petty cash fund when it is established and replenished. Entries are also required when the size of the fund is increased or decreased, and when financial statements are prepared.

Yes. A bank contributes significantly to internal control over cash because it: (1) safeguards cash on deposit, (2) minimizes the amount of currency that must be kept on hand, and (3) provides a double record of all bank transactions.
The lack of agreement between the balances may be due to either: (1) Time lags—a check written in July does not clear the bank until August. (2) Errors—a check for $110 is recorded by the depositor at $101.
(a) An NSF check occurs when the checkwriter’s bank balance is less than the amount of the check. (b) In a bank reconciliation, a customer’s NSF check is deducted from the balance per books. (c) An NSF check results in an adjusting entry in the company’s books, as a debit to Accounts Receivable and a credit to Cash.
(a) Yes. Cash equivalents are highly liquid investments that can be converted into a specific amount of cash with maturities of three months or less when purchased. Cash equivalents may be reported with cash in the current assets section of the statement of financial position. (b) Cash restricted for a special purpose should be reported as a current or noncurrent asset depending on when the cash is expected to be used.

Questions Chapter 7 (Continued)

Cash should be reported at €22,850 (€8,000 + €850 + €14,000).
TSMC reports cash and cash equivalents of NT$541,253,833 in its 2016 consolidated statement of financial position.

BRIEF EXERCISE 7.

(a) Segregation of duties. (b) Independent internal verification. (c) Documentation procedures.

BRIEF EXERCISE 7.

(a) Physical controls. (b) Human resource controls. (c) Independent internal verification. (d) Segregation of duties. (e) Establishment of responsibility.

BRIEF EXERCISE 7.

(a) Cash ............................................................... 6,820. Cash Over and Short .................................... 50. Sales Revenue ........................................ 6,871.

(b) Cash ............................................................... 6,899. Cash Over and Short .............................. 28. Sales Revenue ........................................ 6,871.

BRIEF EXERCISE 7.

Cash ( € 1,125 – € 160) ................................... 965. Cash Over and Short ............................................ 15. Sales Revenue .............................................. 980.

BRIEF EXERCISE 7.

(a) Documentation procedures. (b) Independent internal verification. (c) Physical controls. (d) Establishment of responsibility. (e) Segregation of duties.

BRIEF EXERCISE 7.

Mar. 20 Postage Expense .......................................................... 52 Freight-Out .................................................................... 26 Travel Expense ............................................................. 10 Cash Over and Short .................................................... 3 Cash ( € 100 - € 9) .................................................... 91

BRIEF EXERCISE 7.

A check provides documentary evidence of the payment of a specified sum of money to a designated payee.
A bank statement provides a double record of a depositor’s bank transactions. It also is used in making periodic independent bank reconciliations.

BRIEF EXERCISE 7.

(a) Outstanding checks — deducted from cash balance per bank. (b) Bank service charge — deducted from cash balance per books. (c) Collection of note by bank — added to cash balance per books. (d) Deposits in transit — added to cash balance per bank.

BRIEF EXERCISE 7.

The reconciling items per the books, items (b) and (c) above, will require adjustment on the books of the depositor.
The other reconciling items, deposits in transit and outstanding checks, do not require adjustment by the bank. When these items reach the bank, the bank balance will automatically adjust itself. These items have already been recorded by the depositor so they do not need to make an adjustment.

SOLUTIONS FOR DO IT! EXERCISES

DO IT! 7.

Violates the control activity of documentation procedures. Source docu- ments should be promptly forwarded to the accounting department so accounting entries can be made. This control activity helps to ensure timely recording of sales transactions and contributes directly to the accuracy and reliability of the accounting records.
Violates the control activity of segregation of duties. Different individuals should be responsible for related activities, such as these three related purchasing activities. Many abuses could occur: placing orders with friends and getting kickbacks; performing cursory counts and inspec- tions of delivered goods; approving fictitious invoices for payment.
Violates the control activity of establishment of responsibility. Great Foods would be unable to determine who was responsible for a cash shortage; this lapse could even encourage employee theft.

DO IT! 7

All mail receipts should be opened in the presence of two mail clerks. Those mail clerks should immediately stamp each check “For Deposit Only.” The mail clerks should prepare, in duplicate, a list of the checks received each day. The checks and list should be sen t on to the cashier’s department each day, and the cashier should deposit the checks daily. The duplicate list should be sent to the treasurer’s department and used to confirm that all receipts were deposited and recorded.

DO IT! 7

Aug. 1 Petty Cash ..................................................... 100 Cash ....................................................... 100

31 Postage Expense .......................................... 31 Supplies ........................................................ 42

Miscellaneous Expense 25.

Cash Over and Short .................................... 4 Cash ($100 – $7) .................................... 93

DO IT! 7.

Roger should treat the reconciling items as follows:

Outstanding checks: Deduct from balance per bank.
A deposit in transit: Add to balance per bank.
The bank charged to our account a check written by another company: Add to balance per bank.
A debit memorandum for a bank service charge: Deduct from balance per books.

DO IT! 7.

True.
False.
False.
True. (NT$50,000 + NT$400)

EXERCISE 7 (Continued)

(a) (b)

Procedure Weakness Principle

Recommended Change

The accountant should not handle cash.

Segregation of duties.

The cashier’s department should make the deposits.

Cash is not independently counted.

Independent internal verification.

A cashier office supervisor should count cash.

Cashiers are not bonded.

Human resource controls.

All cashiers should be bonded.

EXERCISE 7.

(a) (b)

Procedure Weakness Principle

Recommended Change

The bank reconciliation is not independently prepared.

Independent internal verification.

Someone with no

Cash 25.

responsibilities should prepare the bank reconciliation.

The approval and payment of bills is done by the same individual.

Segregation of duties.

The store manager should approve bills for payment and the treasurer should sign and issue checks.

Checks are not stored in a secure area.

Physical controls.

Checks should be stored in a safe or locked file drawer.

EXERCISE 7 (Continued)

(a) (b)

Procedure Weakness Principle

Recommended Change

After payment, bills are simply filed in a folder.

Documentation procedures.

Bills should be stamped PAID before being placed in the folder.

Checks are not prenumbered.

Documentation procedures.

Checks should be prenumbered and subsequently accounted for.

EXERCISE 7.

(a) Weaknesses (b) Suggested Improvement

Checks are not prenumbered. Use prenumbered checks.
The purchasing agent signs checks.

Only the treasurer’s department personnel should sign checks.

Unissued checks are stored in unlocked file cabinet.

Unissued checks should be stored in a locked file cabinet with access restricted to authorized personnel.

After payment, the invoice is filed.

The invoice should be stamped PAID.

The purchasing agent records payments in cash disburse- ments journal.

Only accounting department personnel should record cash disbursements.

EXERCISE 7.

Procedure IC good or weak? Related internal control principle 1. Weak Establishment of Responsibility 2. Good Independent Internal Verification 3. Weak Segregation of Duties 4. Good Segregation of Duties 5. Weak Documentation Procedures

EXERCISE 7.

Procedure IC good or weak? Related internal control principle 1. Good Human Resource Controls 2. Weak Establishment of Responsibility 3. Weak Segregation of Duties 4. Good Independent Internal Verification 5. Good Physical Controls

EXERCISE 7.

May 1 Petty Cash ...................................................... 100. Cash .......................................................... 100.

June 1 Delivery Expense ........................................... 31. Postage Expense ........................................... 39. Miscellaneous Expense ................................. 25. Cash Over and Short ..................................... 3. Cash ($100 - $1) .............................. 98.

July 1 Delivery Expense ........................................... 21. Entertainment Expense ................................. 51. Miscellaneous Expense ................................. 24. Cash ($100 - $3) .............................. 96.

July 10 Petty Cash ...................................................... 30. Cash .......................................................... 30.

EX11 3 AP Simple 10 – Number LO BT Difficulty Time (min.)
EX12 3 AP Simple 12 –
EX13 3 AN Moderate 10 –
EX14 4 AP Simple 8 –
EX15 4 AP Moderate 8 –
P1 1, 2 C Simple 20 –
P2 1, 2 E Moderate 35 –
P3 2 AP Simple 20 –
P4 3 AP Moderate 20 –
P5 3 AP Moderate 40 –
P6 3 AP Moderate 40 –
P7 1, 2, 3 AN Complex 35-
CT1 1, 4 C Simple 10 –
CT2 4 AN Simple 8 –
CT 3 1 AN Simple 10 –
CT 4 2 AN Moderate 15 –
CT 5 2 E Simple 10 –
EXERCISE 7.
Mar. 1 Petty Cash.................................................................
Cash
15 Postage Expense.......................................................
Freight-Out
Miscellaneous Expense
Travel Expense
Cash Over and Short
Cash ( € 100 - € 2)
20 Petty Cash..................................................................
Cash
EXERCISE 7.
(a) Cash balance per bank statement £3,560.
Add: Deposits in transit 530.
4,090.
Less: Outstanding checks 730.
Adjusted cash balance per bank £3,360.
Cash balance per books £3,875.
Less: NSF check £ 490.
Bank service charge 25 515.
Adjusted cash balance per books £3,360.
(b) Accounts Receivable 490.
Cash 490.
Miscellaneous Expense 25.
Cash 25.

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