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Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
01. Disagree. 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. Thus improving the accuracy of the accounting records is only one of the objectives of internal control.
02. 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.
03. Two applications of segregation of duties are:
(1) The responsibility for related activities should be assigned to different
individuals. (2) The responsibility for establishing the accountability for an asset
should be separate from the physical custody of that asset. 04. Documentation procedures contribute to good internal control by providing
evidence of the occurrence of transactions and events. 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.
05. Physical controls include safes, vaults, electronic burglary systems and
sensors, and locked warehouses. These controls help safeguard a company’s assets. Other controls such as cash registers and computerized accounting equipment contribute to the accuracy and reliability of the accounting records.
Physical controls apply to cash disbursements when (a) blank cheques are stored in a safe, and access to the safe is restricted to authorized personnel, and (b) electronic means are used to imprint amounts on cheques. Other controls apply when the approved invoice is stamped PAID after payment.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
06. Segregating the physical custody of assets from accounting record
keeping is not enough to ensure that nothing has been stolen. A performance review still needs to be done. In such a review, the accounting records are compared with existing assets or with external sources of information.
07. 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.
08. Cash registers 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.
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.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
10. 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).
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 and a fee that averages 3.5% of the credit card sale. In both types of transaction 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.
11. Two mail clerks contribute to a more accurate listing of mail receipts. In
addition, two clerks reduce the likelihood of mail receipts being diverted to personal use or other fraud, as collusion would be required.
12. From a company’s perspective there are not significant differences
between customers using EFT and on-line banking and EFT and automatic pre-authorized monthly payments. The main difference is that with EFT and automatic pre-authorized monthly payments, the company begins the transaction and electronically request the funds. As a result the company knows the transaction is happening and can journalize it. With EFT and on-line banking, the company cannot anticipate in advance when and how much it will collect in cash. Therefore the company will record the cash collection after the funds have been deposited in the bank account and the company has received notification from the bank.
13. Payment by cheque or electronic funds transfer contributes to effective
internal control over cash disbursements. Prenumbered cheques help to ensure that all disbursements are accounted for. In addition, the bank provides a double record of the cash disbursements, and safekeeping of the cash until paid. However, effective control is also possible when small payments are made from an imprest petty cash fund.
14. The procedure and related control activity are:
Procedures Activities (1) Controller signs cheques Establishment of responsibility (2) Cheques imprinted Documentation; physical controls (3) Comparing cheques with Performance review; segregation approved invoices before signing of duties
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
QUESTIONS (Continued) 15. Wanda could potentially commit a fraud by:
(1) falsifying a receiving report and approving payment for 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 then falsifying the receiving reports and approving the payment to the supplier even though the goods are not in the store.
Instructors note: These are only two examples. Students may develop other valid examples.
16. This could be a problem for the company as Olga may start taking longer
and longer to repay the cash and may eventually end up stealing cash from the petty cash fund for personal expenses. Another problem is that there may not be cash in the petty cash fund when needed to pay for expenses depending on the amount Olga is borrowing.
To strengthen the system the company could implement the following controls:
Management should not allow the fund to be used for certain types of transactions (such as making short-term loans to employees).
Each payment from the fund must be documented on a prenumbered petty cash receipt, signed by both the custodian and the person who receives the payment.
Management should periodically conduct a surprise check of the petty cash fund and ensure the cash on hand plus receipts are equal to the petty cash fund balance—they should make sure there are no unexplained shortages and all payments have been in accordance with company policies.
17. (a) A signature card shows the signatures of authorized cheque signers.
It is used by the bank to validate signatures on cheques. Thus, the card should prevent unauthorized persons from signing cheques.
(b) A cheque provides documentary evidence of the payment of a
specified sum of money to a designated payee. (c) A bank statement provides a double independent record of a
depositor's bank transactions. It also is used in making periodic independent bank reconciliations.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
QUESTIONS (Continued) 18. An employee who has no other responsibilities that relate to cash should
prepare the bank reconciliation. If a person had responsibility for handling cash and also prepared the bank reconciliation, they could use the bank reconciliation to hide fraud with cash receipts or cash disbursements.
19. Paul should not rely on on-line banking to give him an accurate balance in
his bank account. On-line banking can provide an up to date balance but the balance will not be accurate if there are any deposits in transit or outstanding cheques. The balance will also not be accurate if the bank has made an error. Paul should keep his own records and reconcile his calculation of the bank balance with what the bank has reported. This is the only way to know if there are any deposits in transit, outstanding cheques or bank errors and thus have accurate information on his bank account balance.
20. Anah is incorrect, since the March cheque has still not cleared the bank at April 30 it must be included in the April 30
th bank reconciliation as an
outstanding cheque because it is still outstanding on April 30th.
21. (a) An NSF cheque occurs when the customer's bank balance is less
than the amount of the cheque. (b) In a bank reconciliation a customer's NSF cheque is deducted from
the balance per books. (c) An NSF cheque results in an adjusting entry in the company's books,
as a debit to Accounts Receivable and a credit to Cash.
22. Yes, I agree that cash equivalents are basically the same as cash. Cash equivalents are highly liquid investments that may be converted to a specific amount of cash, with maturities of three months or less when purchased. Because of their liquidity, cash equivalents are considered to be “near cash” and are often combined with cash for reporting purposes in the current assets section of the balance sheet.
23. 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.
A compensating balance is a minimum cash balance that a company is
required to keep in its bank account as support for a bank loan. These are similar to restricted funds and are reported as noncurrent assets.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
November: Cheques written and recorded in books in Nov. $9,520 Less: Cheques paid by bank in Nov. 8,677 Outstanding cheques at Nov. 30 $ 843 December: Cheques written and recorded in books in Dec. $12,617 Plus: Outstanding cheques at Nov. 30 843 Total cheques that could be paid by bank in Dec. 13,460 Less: Cheques paid by bank in Dec. 10,949 Outstanding cheques at Dec. 31 $ 2,511
BRIEF EXERCISE 7-11
Manuliak Company
Bank Reconciliation
July 31
Cash balance per bank ..................................................... $7,920
Add: Deposits in transit .................................................. 2,152
I have reviewed your cash disbursements system and suggest that you make the following improvements: 1. Abekah Company should use prenumbered cheques.
These should be stored in a locked file cabinet or safe with access restricted to authorized personnel.
2. The purchasing department should approve bills for
payment. The controller’s department should prepare and sign the cheques. Two signatures should be required on every cheque. The invoices should be stamped paid so that they cannot be paid twice.
3. Only the accounting department personnel should record
cash disbursements. 4. An internal auditor or other independent party should
reconcile the bank statement. 5. An independent party should verify receipt of goods. If you have any questions about implementing these suggestions, please contact me.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
(a) The weaknesses in internal accounting control over
collections are: (1) Each usher could take cash from the collection plates
en route to the basement office. (2) The head usher counts the cash alone. (3) The head usher’s notation of the count is left in the
safe. (4) The financial secretary counts the cash alone. (5) The financial secretary withholds $150 to $200 per
week. (6) The cash is vulnerable to robbery when kept in the safe
overnight. (7) Cheques are made payable to “cash.” (8) The financial secretary has custody of the cash,
maintains church records, and prepares the bank reconciliation.
(b) The improvements should include the following: (1) The ushers should transfer their cash collections to a
cash pouch (or bag) held by the head usher. The transfer should be witnessed by a member of the finance committee.
(2) The head usher and finance committee member should take the cash to the office. The cash should be counted by the head usher and the financial secretary in the presence of the finance committee member.
(3) Following the count, the financial secretary should prepare a deposit slip in duplicate for the total cash received, and the secretary should immediately deposit the cash in the bank’s night deposit vault.
(4) At the end of each month, a member of the finance committee should prepare the bank reconciliation.
(5) All cheques should be made payable in the church’s name.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
(b) The advantage of accepting debit and bank credit card
transactions as opposed to accepting only cash and
personal cheques from customers is that the company
knows immediately if the customer has enough money in
the bank to pay for their purchases. A second advantage is
that it will likely increase sales if customers can use debit or
credit cards. The disadvantage is that the bank charges a
fee on all transactions using debit and credit cards.
(c) The benefit of having a petty cash fund is that it can be
used to pay relatively small amounts, while still maintaining control. Some expenses are best made by cash rather than by cheque because of the nature of the expense–there are some instances where either a cheque is not accepted or it is not practical to issue a cheque. The cost-benefit principle justifies paying some expenses with cash rather than issuing a cheque.
There are a number of internal controls over the petty cash fund that Gamba should follow: One person should be appointed the petty cash
custodian and will be responsible for the fund. A prenumbered petty cash receipt should be signed by
the custodian and the individual receiving payment for each payment from the fund.
The treasurer’s office should examine all payments and stamps supporting documents to indicate they were paid when the fund is replenished.
Surprise counts should be made at any time to determine whether the fund is intact.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
(c) Some expenses are made from petty cash rather than by
cheque because of the nature of the expense–there are some instances where either a cheque is not accepted or it is not practical to issue a cheque. The cost-benefit principle justifies paying some expenses with cash rather than issuing a cheque.
There are internal controls over payments from petty cash. A custodian is responsible for the fund. A prenumbered petty cash receipt signed by the custodian and the individual receiving payment is required for each payment from the fund. The treasurer’s office examines all payments and stamps supporting documents to indicate they were paid when the fund is replenished. Surprise counts can be made at any time to determine whether the fund is intact.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
1. Cash on hand ....................................................... $ 1,600 2. Petty cash fund .................................................... 43 3. Bank chequing account ...................................... 7,460 4. BMO money market fund .................................... 5,000 6. US Dollar Account ............................................... 2,241 7. American Express credit card slips* [$500 - ($500 x 4%)] ......................................... 480 Total .................................................................. $16,824
*American Express credit card slips are effectively a deposit in transit because the funds will be deposited in the bank account in two days.
(b) 2. The petty cash fund should have been replenished at
year-end. Since this has not happened, the company must record:
Accounts receivable of $100 for the IOU Expenses of $55 ($155 - $100 IOU) Cash shortage of $2 and a reduction of petty cash of $157 ($200 -
$43) 4. The 6-month term deposit should be recorded as a
short-term investment, and reported as a current asset on the balance sheet.
5. The cash due from the customer should be recorded as
an account receivable, and reported as a current asset on the balance sheet. The remainder of the entry should update merchandise inventory (current asset), sales (revenue), and cost of goods sold (expense).
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
Roger has created a situation that leaves many opportunities for undetected theft. Here is a list of some of the deficiencies in internal control. You may find others. 1. Establishment of responsibility
Inadequate control over the cash box. In effect, it was operated like a petty cash fund, but too many people had the key. Instead, Roger should have had the key and dispersed funds when necessary for purchases.
2. Segregation of duties
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. 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.
Sara Billings was collecting tickets and receiving cash
for additional tickets sold. Instead, there should have been one person selling tickets at the door and a second person collecting tickets.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
The tickets were unnumbered. By numbering the tickets, the students could have been held more accountable for the tickets.
No record was kept of which students took tickets to sell or how many they took. 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.)
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. Instead, 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.
Instead of receipts, students simply wrote notes saying how they used the funds. Instead, it should have been required that they provided a valid receipt.
A receipt was not received from Obnoxious Al. Without a receipt, there is no way to verify how much Obnoxious Al was actually paid. For example, it is possible that he was only paid $100 and that Roger took the rest.
4. Physical controls and establishment of responsibility
The tickets were left in an unlocked box on his desk. Instead, Roger should have assigned control of the tickets to one individual, in a locked box which that student alone had control over.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
(a) Weaknesses & (b) Problems (c) Suggested Improvements 1. No separation 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.
The duties of receiving cash and admitting students should be assigned to separate individuals.
2. There is no segregation of duties
in the accounting function. 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. Each sales person is responsible
for determining credit policies and
they receive a commission based
on sales. They could provide
credit to an bad credit risk in order
to receive the commission on the
sale.
An independent person should
be responsible for providing
credit to customers.
4. 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.
5. Receiving and purchase orders
have been eliminated which could
result in unauthorized purchases
and/or receipts or fictitious
invoices being paid as no support
is required. An employee could set
up a bank account and collect the
payment.
Receiving reports and purchase
orders should be reinstated.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
(b) The advantage of accepting debit and bank credit card
transactions as opposed to accepting only cash and
personal cheques from customers is that the company
knows immediately if the customer has enough money in
the bank to pay for their purchases. A second advantage is
that it will likely increase sales if customers can use debit or
credit cards. The disadvantage is that the bank charges a
fee on all transactions using debit and credit cards.
(c) The benefit of having a petty cash fund is that it can be
used to pay relatively small amounts, while still maintaining control. Some expenses are best made by cash rather than by cheque because of the nature of the expense–there are some instances where either a cheque is not accepted or it is not practical to issue a cheque. The cost-benefit principle justifies paying some expenses with cash rather than issuing a cheque.
There are a number of internal controls over the petty cash fund that Rossi should follow: One person should be appointed the petty cash
custodian and will be responsible for the fund. A prenumbered petty cash receipt should be signed by
the custodian and the individual receiving payment for each payment from the fund.
The treasurer’s office should examine all payments and stamps supporting documents to indicate they were paid when the fund is replenished.
Surprise counts should be made at any time to determine whether the fund is intact.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
1. Cash on hand ...................................................... $ 5,000 2. Petty cash fund ................................................... 125 3. Commercial bank savings account .................. 100,000 Commercial bank chequing account ........... 25,000 US bank account ............................................ 48,000 10. Special bank account–customer cash deposits 9,250 Total................................................................. $187,375
(b) If the company combined its cash and cash equivalents,
the money market fund of $32,000 and the treasury bills of $75,000 would also be included.
(c) 2. 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 $375. Only $125 is actually cash at this point in time. Once the petty cash fund is reimbursed, $500 cash will be available once again.
4. Restricted cash of $150,000 would be reported as a
current or noncurrent asset, depending on the intended period of use.
5. An unused line of credit would not be reported on the
balance sheet. It may be disclosed in the notes. 6. Amounts due from employees (travel advances) would
be included in Accounts Receivable. 7. Short-term investments (money market fund, treasury
bills and shares) would be listed separately in the current asset section (unless combined as the money market fund and t-bills were in (b)).
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
Part 1 The weaknesses in internal accounting controls in the system recommended by John are: (1) The cash could be stolen from John’s vehicle before it is
deposited in the bank. (2) John could potentially steal from the company and then
cover the theft because of a lack of segregation of duties between the handling of cash, bank reconciling process and recording of transactions in the accounting records.
(3) The accounting information for the business could be lost or stolen if it is all stored on John’s laptop.
(4) John should not be able to write cheques to himself as this leaves the company vulnerable to theft.
Improvements should include the following:
(1) Cash should be deposited in the bank daily. At a minimum
the cash should be locked in a safe until such as time as it can be deposited.
(2) John should be responsible for the accounting function only. Natalie (or some other independent person) should sign all cheques and make all deposits. Cheques should only be signed when there is documentation present to support the payment. All invoices should be stamped “PAID” to avoid duplicate payment.
(3) Bank reconciliations should be prepared by a person independent of the handling and recording of cash. However, this may not be possible in a small organization such as Cookie Creations. At a minimum, Natalie and not John should prepare bank reconciliations monthly.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) Part 1 (Continued) (4) The accounting records should be maintained on site and
regular back-ups should be prepared. It would be best if John used a computer at Cookie Creations to prepare the accounting information; however, if he is going to use his laptop, Natalie should ensure that she is provided with a regular back-up of all the accounting records. This ensures that if John should ever lose his laptop or decide to no longer perform Cookie Creation’s accounting, Natalie would still have access to the company’s accounting records.
(5) John should submit a monthly invoice to Natalie for her approval. Natalie should then write and sign the cheque.
Part 2 (a)
COOKIE CREATIONS Bank Reconciliation
June 30, 2008 Cash balance per bank statement ................................... $3,359 Add: Deposit in transit ..................................... $110 Bank error Cheque No. 603 ($452 - $425) 27 137 3,496 Less: Outstanding cheques ($238 + $247) .................... 485 Adjusted cash balance per bank ......................... $3,011 Cash balance per books ................................................... $3,274 Less: Service charge .......................................... $ 13 Error in deposit June 20th ($155 - $125) . 30 Telus .......................................................... 85 NSF cheque ($100 + $35 service charge) 135 263 Adjusted cash balance per books ................................... $3,011
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
(a) Cash equivalents are highly liquid investments, with
maturities of three months or less when purchased, that can be converted into specific amounts of cash. They include money market funds, money market savings certificates, bank certificates of deposit, and treasury bills and notes. Cash equivalents differ from other types of short-term investments in that they are very liquid (that is, easily turned into cash) and have a low risk of declining in value while held.
(b)
2005 2004
Working Capital Current Ratio
$80,089 - $7,688 =
$72,401
1:10.4$7,688
$80,089
$72,804 - $7,271 =
$65,533
1:10.0$7,271
$72,804
The company’s current ratio has remained fairly constant over 2005 whereas the industry average has decreased. The company’s current ratio is significantly above the industry average in both 2005 and 2004.
(c) Having cash and cash equivalents available provides a company with flexibility; however, uninvested cash does not earn a very high return. Therefore a company will want to carefully monitor the amount of cash it keeps on hand to provide a balance between flexibility and return.
(d) Restricted cash is cash that is not available for general use
because it is restricted for a special purpose.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
(a) The stakeholders in this situation are the clients of the banks and the bank’s managers, employees, and shareholders.
(b) The amount of revenue depending on order of processing
would be: (1) Largest to smallest: 5 bounced cheques x $35 = $175 (2) Smallest to largest: 1 bounced cheque x $35 = $35 (3) In order of cheque number: 4 bounced cheques x $35 = $140
(c) Whether this is ethical is subject to debate. On the one hand, it can be argued that customers have a responsibility to maintain an adequate balance in their accounts. Some customers are frequently overdrawn; thus only severe penalties will persuade them to maintain an adequate balance. However, it could be argued that charging $35 for something that has a cost to the bank of $1.50 is “gouging”—that is, taking unfair advantage of the customer.
(d) In deciding what approach to take, the bank must consider its relationship with the customer. Clearly, by adopting a “largest to smallest” approach, it is going to anger some customers, who may well decide to leave the bank and go to a more customer-friendly bank. However, it could be argued that some of the customers the bank may lose are customers that are frequently overdrawn and therefore costly to the bank. Also, it can be time-consuming to change banks, and most people don’t have the spare time to change banks unless they really need to.
(e) Answer will vary depending on student’s opinion.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition