FinAcctg7SMCh04.docx
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FinAcctg7SMCh04
Chapter4
InternalControlandCash
ShortExercises
(5min.)S4-1
1.Publiccompaniesmustissueaninternalcontrolreport,andtheoutsideauditormustevaluatetheclient’sinternalcontrols.
2.ThePublicAccountancyOversightBoardoverseestheauditorsofpubliccompanies.
3.Anaccountingfirmmaynotbothauditapublicclientandalsoprovidecertainconsultingservicesforthesameclient.
4.Thelawimposesstiffpenaltiesforviolators—25yearsforsecuritiesfraudand20yearsforanexecutivewhomakesafalseswornstatement.
(5-10min.)S4-2
1.Controlenvironment—Topmanagersmustsetthe“toneatthetop”toestablishacontrolenvironment.
2.Riskassessment—Eachcompanymustevaluateitsownrisks,baseduponitsparticularlineofbusiness.
3.Controlprocedures—Specificproceduresareneededforagoodsystemofinternalcontrol.
4.Monitoringofcontrols—Auditorscanmonitoracompany’sactionsanditsfinancialstatements.
5.Informationsystem—Accurateinformationisessentialforsuccessinbusiness.
Studentresponsesmayvaryforthedescriptions.
(5-10min.)S4-3
Separationofdutiesisessentialforsafeguardingassets.Thepersonwhohascustodyofanassetshouldnotalsoaccountfortheasset.Apersonwhoperformsbothdutiescanstealtheassetandhidethetheftbymakingabogusentryintheaccountingrecords.
Studentresponsesmayvary.
(5-10min.)S4-4
ElectronicDevice
ObjectiveofInternalControl
1.Electronicsensorfor
1.Safeguardassets
merchandise
2.Barcodes
1.Promoteoperationalefficiency
2.Ensureaccurateaccounting
records
3.Surveillancecameras
1.Safeguardassets
2.Encourageemployeesto
followcompanypolicy
(10min.)S4-5
ReitmeierCorp.
BankReconciliation
August31,20XX
BANK
BOOKS
Balance,August31
$3,405
Balance,August31
$2,500
Add:
Add:
Depositintransit
500
Bankcollection
550
3,905
Interestrevenue
10
3,060
Less:
Less:
Servicecharge
(20)
Outstandingchecks
(900)
NSFcheck
(35)
Adjustedbankbalance
$3,005
Adjustedbookbalance
$3,005
Reitmeierhascashof$3,005.
(5min.)S4-6
Aug.
31
Cash………………………………………..
550
AccountsReceivable………………...
550
Collectiononaccount.
31
Cash………………………………………..
10
InterestRevenue……………………...
10
Interestearnedonbankbalance.
31
MiscellaneousExpense………………...
20
Cash…………………………………….
20
Bankservicecharge.
31
AccountsReceivable……………………
35
Cash……………………………………..
35
NSFcheck.
(5min.)S4-7
Itappearsthattheemployeehasstolen$1,000(adjustedbookbalance,$3,600−adjustedbankbalance,$2,600).Theadjustedbankbalanceisthecompany’struecashbalance,andthecompanybooksshowmorecashonhand.Therefore,thebooksmustbeincorrect.
(5min.)S4-8
McCormickwillnoticeagapinthesequenceofsalesreceiptsforthereceiptthatCastillodestroyed.ThisknowledgewillleadMcCormicktoinvestigatewhathappenedtothemissingreceiptandwhathappenedtotherelatedcash.
(10min.)S4-9
1.Payingbycheckcarriesthreecontrolsovercash:
∙Thecheckprovidesarecordofthepayment.
∙Thecheckmustbesignedbyanauthorizedofficial.
∙Beforesigningthecheck,theofficialshouldstudytheevidencesupportingthepayment.
2.Adishonestpurchasingagentcould:
∙Purchasegoodsandhavethemdeliveredtohishomeorotherlocationthathecontrols.
∙Approvepaymentbythecompanyforgoodsthathespenttoomuchon,andthensplittheexcesswiththesupplier.
Companiesavoidthisinternalcontrolweaknessbyseparatingthefollowingdutiesrelatedtothepurchaseof,andpaymentfor,goods:
∙purchasinggoods
∙receivinggoods
∙approvingandpayingforgoods
(5min.)S4-10
Acashbudgetstartswiththebeginningcashbalance,addsbudgetedcashreceipts,andsubtractsbudgetedcashpayments.Theresultiscashavailableattheendoftheperiod.Bycomparingcashavailabletoourbudgetedcashbalance,wecanseewhetherwehavecashavailableforadditionalinvestments,orifwe’llneednewfinancing.
Studentresponsesmayvary.
(5-10min.)S4-11
CaliforniaArtichokeGrowers
CashBudget
Year2008
Millions
Cashbalance,beginning
$4
Estimatedcashreceipts—total
97
101
Estimatedcashpayments—total
(95)
Cashavailable(needed)beforenewfinancing
6
Budgetedcashbalanceneeded
(5)
Cashavailableforadditionalinvestments
$1
(5min.)S4-12
FordshouldreporttheerrorstoMcGregorbecauseMcGregorisFord’ssupervisor,andMcGregorisresponsiblefortheerrors.IfMcGregorfailstotakeaction,thenFordshouldreporttheerrorstothemanageroftheorganization.Inanyevent,outsiderswhoarerelyingonYellowP’sfinancialstatementsmustbemadeawareoftheneedtocorrectthereportednetincomefigure.
Exercises
(10min.)E4-13
Acomputervirusentersprogramcodewithoutyourconsentandperformsdestructiveactiontoyourcomputerfilesorprograms.
ATrojanHorseisamaliciouscomputerprogramthathidesinsidealegitimateprogramandworkslikeavirustocorruptyourcomputerfilesorprograms.
AphishingexpeditioncanbeaWebsitethatattractsvisitorswhomaybetrickedintorevealingtheiraccountnumbers,socialsecuritynumbers,passwords,orothervaluabledata.ThecreatoroftheWebsitethenusestheunsuspectingWeb-sitevisitors’datatostealfromthemandforotherillicitpurposes.
(20-30min.)E4-14
a.Separationofdutieslimitsthechancesforfraud(lossofassets)andalsopromotestheaccuracyoftheaccountingrecords.Thisallowsmanagerstorelyontheaccountingrecordstoproduceinformationusefulforoperatingthebusiness.
b.Cashisimportantnotbecauseofitsamountasreportedonthebalancesheet,butbecauseofitseffectonabusiness.Alltransactionsultimatelyaffectcash.Businessespurchaseassetsandmustpaycash.Theymakesalesandcollectcash.Allexpensesultimatelyrequirecash.Also,cashissusceptibletotheftbecauseitisamediumofexchange.Thesefactorscombinetogivecashmoreimportancethanitsaccountbalancewouldsuggest.
c.Punchingaholethroughsupportingdocumentsreducestheopportunityforfraud.Withoutthiscontrolprocedure,adishonestemployeecouldresubmitdocumentsforpaymentasecondtime.Theemployeecouldchangethepayee’saddressandhavethechecksenttoanaddresstheemployeecontrols.Ortheemployeecouldarrangetohavethesecondpayeesplitthepaymentwiththeemployee.Cancelingthedocumentsmakesitdifficulttogetapprovalforaduplicatepayment.
Studentresponsesmayvary.
(5-20min.)E4-15
a.Millerhasaccesstothecashcollected,andhealsopreparesthecashreport.Withaccesstobothitems,Millercanstealcashandfalsifyhiscashreporttoconcealhistheft.
b.Fisherpreparesthepurchasingorderandalsoreceivesthegoods.Shecanaddsomeitemstothepurchaseorderandhavetheseextraitemsshippedtoalocationshecontrols.Whenthegoodscomein,shecheckstheincomingshipment,sothere’snooutsidepartytolearnofherdishonesty.
c.Anexternalauditnormallyincludesanexaminationoftheclient’sfinancialstatementsandtheunderlyingtransactions.Withnoexaminationoftheseimportantitems,theauditormayreachthewrongconclusionaboutMattson’sfinancialstatements.PeoplewholentmoneytoMattsonorboughtMattsonstockmaymakeunwisedecisionsintheirdealingswithMattsonandlosemoneyasaresult.
Studentresponsesmayvary.
(10min.)E4-16
Cashpayments:
a.Stronginternalcontrol.Thereisagoodseparationofduties.Supervisorsrequestequipment,andthehomeofficepurchasestheequipment.
b.Weakinternalcontrol.Supervisorsbothrequest,purchase,andpayforequipmentwithlittleoversightbythehomeoffice.
Cashreceipts:
a.Weakinternalcontrol.Theaccountantbothhandlescashandaccountsforcash.
b.Stronginternalcontrol.Thereisagoodseparationofduties.Differentpeoplehandlecashandaccountforcash.
(10min.)E4-17
TopreventMoore’sembezzlement,DowntownFlint’sboardofdirectorscouldhave:
a.NotpermittedMooretowriteDowntownFlintChecks.Instead,appointaboardmembertowritethechecks.
b.NotpermittedMooretoreceivecashthatcametoDowntownFlint.Havecashsenttoalockboxatthebankandappointaboardmembertogetthecashfromthelockbox.
c.SupervisedMoore’sworkbyexaminingDowntownFlintdocumentssuchaspaidchecks.
d.HadanauditofDowntownFlinttransactionsandfinancialstatements.
Studentresponsesmayvary.
(5-10min.)E4-18
1.b5.d
2.b6.c
3.d7.c
4.a
(10-20min.)E4-19
LeAnnBryant
BankReconciliation
November30,20X6
BANK:
Balance,November30
$604
Add:
Depositintransit
846
Less:
Outstandingchecks:
CheckNo.
626
$25
627
275
(300)
Adjustedbankbalance
$1,150
BOOKS:
Balance,November30
$1,197
Less:
Correctionofbookerror—
Recorded$85checkas$58
$27
NSFcheck
8
Servicecharge
12
(47)
Adjustedbookbalance
$1,150
(10-20min.)E4-20
TimVanWinkle
BankReconciliation
May31,20XX
BANK:
Balance,May31
$595
Add:
Depositintransit
1,788
2,383
Less:
Outstandingchecks
(603)
Adjustedbankbalance
$1,780
BOOKS:
Balance,May31
$1,882
Add:
EFTcollection—rent
300
2,182
Less:
Servicecharge
$12