Solution manual financial accounting 9th harrison ch04

The adjusted bank balance is the company’s true cash balance, and the company books show more cash on hand.. S 4-13 A cash budget starts with the beginning cash balance, adds budgeted c

The Three Components of the Fraud Triangle

1 Motive — Fraud generally results from either critical need or greed on the part of the perpetrator Regardless of whether the driving force is need or greed most perpetrators are driven to attempt to acquire something that belongs to others

2 Opportunity — The opportunity to commit fraud usually arises through weak internal controls

3 Rationalization — The perpetrator(s) is (are) convinced, in their own minds, that they deserve the object of the fraudulent behavior They may believe no one else will ever know or even that everybody else is

(5-10 min.) S 4-2

COMPONENTS OF INTERNAL CONTROL

1 Control environment — Top managers must set the “tone at the top”

to establish a control environment

2 Risk assessment — Each company must evaluate its own risks, based upon its particular line of business

3 Control procedures — Specific procedures are needed for a good system of internal control

4 Monitoring of controls — Auditors can monitor a company’s actions and its financial statements

5 Information system — Accurate information is essential for success

in business

Student responses may vary for the descriptions

(5-10 min.) S 4-3

Separation of duties is essential for safeguarding assets The person

who has custody of an asset should not also account for the asset A

person who performs both duties can steal the asset and hide the theft

by making a false entry in the accounting records

Student responses may vary

(5-10 min.) S 4-4

There are several major internal control procedures as discussed in the chapter besides separation of duties:

1 Smart hiring practices The company should be careful to hire both

competent and honest personnel Smart hiring practices involve conducting background checks on job applicants, as well as training and supervision on the job

2 Comparisons and compliance monitoring No person or department

should be allowed to completely process a transaction from beginning

to end without being checked by another person or a computer program Examples of comparisons and compliance monitoring are the use of operating and cash budgets Also, in key functions, one employee (or a computer program) double checks the work of another for accuracy

3 Adequate records help to assure that sufficient hard copy documents

or electronic information is kept by the entity to support the validity of transactions that were processed Examples include sales invoices, purchase orders, shipping records, and customer remittance advices Among the benefits of adequate records is the ability to provide an audit trail later for internal or external auditors to follow in auditing the entity’s financial statements

4 Limited access goes hand in hand with separation of duties to assure

(continued) S 4-4

only people with custodial responsibilities (such as the cashier or the warehouse) should be allowed access to assets (such as cash or inventory) Only people with recordkeeping responsibilities (such as accountants) should have access to the company’s journals and ledgers

5 Proper approvals No transaction should be processed without

management’s general or specific approval Generally, the larger the transaction, the higher the organizational level of approval necessary

Notice that the first letters of these attributes spell the acronym SCALP

That’s an easy and comprehensive way to remember the control

procedures involved in internal controls

(10 min.) S4-5

A computer virus enters program code without your consent and

performs destructive action to your computer files or programs

A Trojan Horse is a malicious computer program that hides inside a

legitimate program and works like a virus to corrupt your computer files

or programs

A phishing expedition can be a Web site that attracts visitors who may

be tricked into revealing their account numbers, social security numbers, passwords, or other valuable data The creator of the Web site then uses the unsuspecting Web-site visitors’ data to steal from them and for other illicit purposes

(20-30 min.) S 4-6

Cash is important not because of its amount as reported on the balance sheet, but because of its effect on a business All transactions ultimately affect cash Businesses purchase assets and must pay cash They make sales and collect cash All expenses ultimately require cash Also, cash is susceptible to theft because it is

a medium of exchange These factors combine to give cash more importance than its account balance would suggest

Student responses may vary

(20-30 min.) S 4-7

Punching a hole through supporting documents reduces the opportunity for fraud Without this control procedure, a dishonest employee could resubmit documents for payment a second time The employee could change the payee’s address and have the check sent

to an address the employee controls Or the employee could arrange

to have the second payee split the payment with the employee Canceling the documents makes it difficult to get approval for a duplicate payment

Student responses may vary

(10 min.) S 4-8 Rampart Corp

Bank Reconciliation October 31, 2012

Rampart has cash of $3,175

(5 min.) S 4-10

It appears that the employee has stolen $710 (adjusted book balance,

$4,400 − adjusted bank balance, $3,690) The adjusted bank balance is

the company’s true cash balance, and the company books show more cash on hand Therefore, the books must be incorrect

(5 min.) S 4-11

Sims will notice a gap in the sequence of sales receipts for the receipt that Cilla destroyed This knowledge will lead Sims to investigate what happened to the missing receipt and what happened to the related cash

(10 min.) S 4-12

1 Paying by check carries three controls over cash:

supporting the payment

2 A dishonest purchasing agent could:

that he controls

and then split the excess with the supplier

Companies avoid this internal control weakness by separating the following duties related to the purchase of, and payment for, goods:

(5 min.) S 4-13

A cash budget starts with the beginning cash balance, adds budgeted cash receipts, and subtracts budgeted cash payments The result is cash available at the end of the period By comparing cash available to our budgeted cash balance, we can see whether we have cash available for additional investments, or if we’ll need new financing

Student responses may vary

(5-10 min.) S 4-14

Cooper Apple Growers Cash Budget Year 2011

Millions

111

Cash available (needed) before new financing 25

Cash available for additional investments $ 5

(5 min.) S 4-15

Rocker should report the errors to Doon because Doon is Rocker’s supervisor, and Doon is responsible for the errors If Doon fails to take action, then Rocker should report the errors to the manager of the organization In any event, outsiders who are relying on Dill Limited’s financial statements must be made aware of the need to correct the reported net income figure

Exercises

(5-20 min.) E 4-16A

a Munson has access to the cash collected, and he also prepares the cash report With access to both items, Munson can steal cash and falsify his cash report to conceal his theft

b Fulton prepares the purchase order and also receives the goods She can add some items to the purchase order and have these extra items shipped to a location she controls When the goods come in, she checks the incoming shipment, so there’s no outside party to learn of her dishonesty

Student responses may vary

(10 min.) E 4-17A

Cash payments:

a Strong internal control There is a good separation of duties Supervisors request equipment, and the home office purchases the equipment

b Weak internal control Supervisors request, purchase, and pay for equipment with little oversight by the home office

(10 min.) E 4-18A

To prevent Flack’s embezzlement, Downtown Columbia’s board of directors could have:

a Not permitted Flack to write checks for Downtown Columbia

Instead, appoint a board member to write the checks

b Not permitted Flack to receive cash that came to Downtown Columbia Have cash sent to a lock box at the bank and appoint a board member to get the cash from the lock box

c Supervised Flack’s work by examining Downtown Columbia’s documents such as paid checks

d Had an audit of Downtown Columbia’s transactions and financial statements

Student responses may vary

(5-10 min.) E 4-19A

(10-20 min.) E 4-20A

D J Harris Bank Reconciliation January 31, 2012 BANK:

Less: Outstanding checks:

(10-20 min.) E 4-21A

Frank White Bank Reconciliation November 30, 2012

BANK:

BOOKS:

2,115 Less:

Charge for printed checks 10

Correction of book error —

recorded $270 check as $27 243 (381)

White’s actual cash balance is $1,734

(10-15 min.) E 4-22A Journal

FROM: Student

SUBJECT: Evaluation of internal control and plan for improvement

There is a weakness in internal control over cash receipts The cash registers do not keep a record of sales With no record, there is no way

to determine how much cash should be in the cash drawer This omission makes it easy for the cashier to steal cash and not get caught

To improve internal control, the company should use cash registers that record each sale The manager can prove the amount of cash in the cash drawer against this recorded amount

(10-15 min.) E 4-24A

The main internal control weakness is that the payroll department both

prepares and distributes the paychecks With both duties, a dishonest

person in the payroll department can create a time sheet for a fictitious employee and then keep the related paycheck after the treasurer returns the signed checks to the payroll department

To correct this weakness, Flat Flyers should have someone other than the payroll department or the shop foreman distribute paychecks to employees For example, the human resources department, which has

no control over the time sheets or the paychecks, could distribute paychecks to the workers

(20-30 min.) E 4-25A

Gale Communications, Inc

Cash Budget Year Ended December 31, 2012

Millions

Budgeted cash receipts:

11,577 Budgeted cash payments:

Payments for cost of

Budgeted cash balance, December 31, 2012 (78) Cash available for additional investments, or

Gale Communications expects to have cash available for additional investments of $19 million during 2012

b Austin prepares the purchase order and also receives the goods She can add some items to the purchase order and have these extra items shipped to a location she controls When the goods come in, she checks the incoming shipment, so there’s no outside party to learn of her dishonesty

Student responses may vary

(10 min.) E 4-28B Cash payments:

a Strong internal control There is a good separation of duties Supervisors request equipment, and the home office purchases the equipment

b Weak internal control Supervisors both request, purchase, and pay for equipment with little oversight by the home office

c Supervised Smart’s work by examining Downtown Huntsville’s documents such as paid checks

d Had an audit of Downtown Huntsville’s transactions and financial statements

Student responses may vary

BANK:

Less: Outstanding checks:

(10-20 min.) E 4-32B

Evan Neal Bank Reconciliation January 31, 2012

BANK:

BOOKS:

2,131 Less:

Charge for printed checks 11

Correction of book error —

recorded $280 check as $28 252 (387)

Neal’s actual cash balance is $1,744

SUBJECT: Evaluation of internal control and plan for improvement

There is a weakness in internal control over cash receipts The cash registers do not keep a record of sales With no record, there is no way

to determine how much cash should be in the cash drawer This omission makes it easy for the cashier to steal cash and not get caught

(10-15 min.) E 4-35B

The main internal control weakness is that the payroll department both

prepares and distributes the paychecks With both duties, a dishonest

person in the payroll department can create a time sheet for a fictitious employee and then keep the related paycheck after the treasurer returns the signed checks to the payroll department

To correct this weakness, Fast Pass should have someone other than the payroll department or the shop foreman distribute paychecks to employees For example, the human resources department, which has

no control over the time sheets or the paychecks, could distribute paychecks to the workers

(20-30 min.) E 4-36B

Donn Communications, Inc

Cash Budget Year Ended December 31, 2012

Millions

Budgeted cash receipts:

11,562 Budgeted cash payments:

Payments for cost of

Budgeted cash balance, December 31, 2012 (79) Cash available for additional investments, or

Donn expects to need new financing of $9 million during 2012

Problems

(15-20 min.) P 4-50A

The internal control weaknesses in Irish Import’s system are:

1 Fitzpatrick controls the content of the invoices With no supervision

of her work, Fitzpatrick could have the suppliers overstate their prices and then arrange to have them split the excess with her after Irish Import pays the invoices

2 Riley has both cash handling and accounting duties With both responsibilities, Riley could steal incoming cash and cover her theft

by manipulating the accounting records

As with all small businesses, the key to effective internal control is more owner involvement O’Shea could:

1 Make the purchase and pay arrangements with the Irish artisans who supply Irish Import’s products Let Fitzpatrick keep locating new products, but don’t let her arrange for the purchases and payment

2 O’Shea could assign either cash handling or accounting duties to Riley and then hire someone else to do the other (accounting or cash- handling) duties Also O’Shea needs to perform the bank reconciliation to keep her eye on cash receipts and cash payments

Separate purchasing, approval, and check-signing duties

b Assignment of

responsibility

Lost revenue, because too many employees are managing the office and neglecting their duties

Assign a single employee to manage the office when the owner is absent

c Separation of

duties

accounting and cash-handling duties

(20-30 min.) P 4-52A

Req 1

Durkin Automotive Bank Reconciliation April 30, 2012

BANK:

Add: Deposits in transit ($892 + $2,048) 2,940

12,000 Less: Outstanding checks —

Add: EFT collection of rent $ 625

Bank collection of note receivable 1,375 Book error — $1,380 check

8,969 Less: EFT payment of insurance $ 397

Unauthorized signature check 455

Service charge 10 (862) Adjusted book balance, April 30, 2012 $ 8,107

(continued) P 4-52A

Req 2

A bank account helps control cash by providing a place for safekeeping The bank also provides a detailed list of the company’s cash transactions that managers can compare to the company’s own cash records and thereby correct any book errors quickly

The bank reconciliation helps control cash by ensuring that the company accounts for its cash transactions correctly and that the bank and book records of cash are correct Also, the bank reconciliation establishes the balance of cash to report on the balance sheet