Financial and Managerial Accounting Study Set 1

Business

Quiz 7 :

Sarbanes-Oxley, Internal Control, and Cash

Quiz 7 :

Sarbanes-Oxley, Internal Control, and Cash

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Bank reconciliation and entries The cash account for Capstone Medical Co. at November 30, 2016, indicated a balance of $89,620. The bank statement indicated a balance of $128,660 on November 30, 2016. Comparing the bank statement and the accompanying canceled checks and memos with the records revealed the following reconciling items: a. Checks outstanding totaled $32,700. b. A deposit of $18,550, representing receipts of November 30, had been made too late to appear on the bank statement. c. The bank collected $26,750 on a $25,000 note, including interest of $1,750. d. A check for $1,500 returned with the statement had been incorrectly recorded by Capstone Medical Co. as $150. The check was for the payment of an obligation to ABC Supply Co. for a purchase on account. e. A check drawn for $490 had been erroneously charged by the bank as $940. f. Bank service charges for November amounted to $60. Instructions 1. Prepare a bank reconciliation. 2. Journalize the necessary entries. The accounts have not been closed. 3. If a balance sheet were prepared for Capstone Medical Co. on November 30, 2016, what amount should be reported as cash?
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1. In bank reconciliation, we record all the transactions that are recorded in company's records but not recorded in bank account and the transactions that are entered in bank account but not entered in company's records.
Deposit in transit, outstanding checks and check charged for incorrect amount are entered in company's records with correct amount but not entered in bank account so we will adjust the bank balance with deposit in transit, outstanding checks and check charged for incorrect amount. Note collected by bank, bank service charges and check recorded for incorrect amount are recorded in bank account with correct amount but not entered in company's records so we will adjust the balance as per company records with note collected by bank, bank service charges and check recorded for incorrect amount. Accordingly, bank reconciliation is prepared below:
img We may note that the adjusted balance of bank statement is equal to the adjusted balance as per company's records.
2. We should pass journal entries to record the transactions that are not entered in company's records so that the company's records show actual balance. Bank service charges are not recorded so we will debit the same to miscellaneous expense. Note collected by bank and interest should be credited to Notes receivable and interest revenue respectively. Accounts Payable should be debited with the amount of difference in recording the check. Accordingly, we pass the following journal entry:
img 3. In balance sheet we record the balance of cash in current assets. Adjusted balance is the correct balance of cash so $114,960 should be reported for cash.

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A ? Items on company's bank statement The following items may appear on a bank statement: 1. Bank correction of an error from recording a $6,200 deposit as $2,600 2. EFT payment 3. Note collected for company 4. Service charge Using the following format, indicate whether each item would appear as a debit or credit memo on the bank statement and whether the item would increase or decrease the balance of the company's account: img B ? Items on company's bank statement The following items may appear on a bank statement: 1. Bank correction of an error from posting another customer's check (disbursement) to the company's account 2. EFT deposit 3. Loan proceeds 4. NSF check Using the following format, indicate whether each item would appear as a debit or credit memo on the bank statement and whether the item would increase or decrease the balance of the company's account: img
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2A
A bank account has a credit balance. All the payments or deductions are debited to the account, that decrease the balance of company's account and all the receipts are credited to the account, that increase the balance of company's account.
Bank correction from recording a $6,200 deposit as $2,600 will decrease the balance so it will be debited to the account. Similarly EFT payment and service charges decrease the balance so they will also be debited to the account. Note collected for company is a receipt so it will be credited and will increase the balance of the account.
Now we can complete the format as below:
img 2B
Bank correction from posting another customer's check (disbursement) to the company's account will increase the balance so it will be credited to the account. Similarly EFT deposit will increase the balance so they will also be credited to the account. Loan proceeds and NSF check will be debited and will decrease the balance of the account.
Now we can complete the format as below:
img

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A ? Internal control elements Identify each of the following as relating to (a) the control environment, (b) control procedures, or (c) information and communication: 1. Organizational structure 2. Report of company's conformity with environmental laws and regulations 3. Proofs and security measures B ? Internal control elements Identify each of the following as relating to (a) the control environment, (b) control procedures, or (c) monitoring: 1. Hiring of external auditors to review the adequacy of controls 2. Personnel policies 3. Safeguarding inventory in a locked warehouse
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1A
There are five elements of internal control: control environment, risk assessment, control procedures, monitoring and information and communication. Let us examine the following to identify their real element:
1. Organizational structure relates to the control environment because the structure creates the framework for overall control operations and environment within an organization.
2. Conformity with environmental laws and regulations is also ensured by the control systems. A report regarding such conformity informs the management about effectiveness or weakness of control systems so this report relates to information and communication.
3. Proofs and security measures relate to the control procedures as these measures are the way of implementing control procedures. There should be proper proofs for all works to implement controls and enough security measures so that nobody is able to disturb the assets and data of the company.
1B
There are five elements of internal control: control environment, risk assessment, control procedures, monitoring and information and communication. Let us examine the following to identify their real element:
1. Hiring of external auditors to review the adequacy of controls relates to monitoring because auditors review all the control procedures and give their suggestions for further improvement. So this is a part of monitoring.
2. Personnel policies relate to the control environment. Management's personnel policies affect all the employees and create an environment within an organization.
3. Safeguarding inventory in a locked warehouse is a control procedure to prevent theft of inventory.

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Transactions for petty cash, cash short and over Cedar Springs Company completed the following selected transactions during June: img img Instructions Journalize the transactions.
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Internal controls Faith Cassen has recently been hired as the manager of Gibraltar Coffee Shop. Gibraltar Coffee Shop is a national chain of franchised coffee shops. During her first month as store manager, Faith encountered the following internal control situations: a. Faith caught an employee putting a case of 1,000 single-serving tea bags in his car. Not wanting to create a scene, Faith smiled and said, "I don't think you're putting those tea bags on the right shelf. Don't they belong inside the coffee shop?" The employee returned the tea bags to the stockroom. b. Gibraltar Coffee Shop has one cash register. Prior to Faith's joining the coffee shop, each employee working on a shift would take a customer order, accept payment, and then prepare the order. Faith made one employee on each shift responsible for taking orders and accepting the customer's payment. Other employees prepare the orders. c. Because only one employee uses the cash register, that employee is responsible for counting the cash at the end of the shift and verifying that the cash in the drawer matches the amount of cash sales recorded by the cash register. Faith expects each cashier to balance the drawer to the penny every time-no exceptions. State whether you agree or disagree with Faith's method of handling each situation and explain your answer.
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Transactions for petty cash, cash short and over Cactus Restoration Company completed the following selected transactions during May 2016: img Instructions Journalize the transactions.
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Ethics in Action During the preparation of the bank reconciliation for Building Concepts Co., Joel Knolls, the assistant controller, discovered that Lone Peak National Bank incorrectly recorded a $3,290 check written by Building Concepts Co. as $329. Joel has decided not to notify the bank but wait for the bank to detect the error. Joel plans to record the $2,961 error as Other Income if the bank fails to detect the error within the next three months. Discuss whether Joel is behaving in a professional manner.
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Evaluating internal control of cash The following procedures were recently installed by The China Shop: a. All sales are rung up on the cash register, and a receipt is given to the customer. All sales are recorded on a record locked inside the cash register. b. Each cashier is assigned a separate cash register drawer to which no other cashier has access. c. At the end of a shift, each cashier counts the cash in his or her cash register, unlocks the cash register record, and compares the amount of cash with the amount on the record to determine cash shortages and overages. d. Checks received through the mail are given daily to the accounts receivable clerk for recording collections on account and for depositing in the bank. e. Vouchers and all supporting documents are perforated with a PAID designation after being paid by the treasurer. f. Disbursements are made from the petty cash fund only after a petty cash receipt has been completed and signed by the payee. g. The bank reconciliation is prepared by the cashier. Instructions Indicate whether each of the procedures of internal control over cash represents (1) a strength or (2) a weakness. For each weakness, indicate why it exists.
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Internal controls The following is an excerpt from a conversation between two salesclerks, Jean Moen and Sara Cheney. Jean and Sara are employed by Turpin Meadows Electronics, a locally owned and operated electronics retail store. Jean: Did you hear the news? Sara: What news? Jean: Neal and Linda were both arrested this morning. Sara: What? Arrested? You're putting me on! Jean: No, really! The police arrested them first thing this morning. Put them in handcuffs, read them their rights-the whole works. It was unreal! Sara: What did they do? Jean: Well, apparently they were filling out merchandise refund forms for fictitious customers and then taking the cash. Sara: I guess I never thought of that. How did they catch them? Jean: The store manager noticed that returns were twice that of last year and seemed to be increasing. When he confronted Neal, he became flustered and admitted to taking the cash, apparently more than $9,000 in just three months. They're going over the transactions of the last six months to try to determine how much Linda stole. She apparently started stealing first. Suggest appropriate control procedures that would have prevented or detected the theft of cash.
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Evaluating internal control of cash The following procedures were recently installed by Raspberry Creek Company: a. After necessary approvals have been obtained for the payment of a voucher, the treasurer signs and mails the check. The treasurer then stamps the voucher and supporting documentation as paid and returns the voucher and supporting documentation to the accounts payable clerk for filing. b. The accounts payable clerk prepares a voucher for each disbursement. The voucher along with the supporting documentation is forwarded to the treasurer's office for approval. c. Along with petty cash expense receipts for postage, office supplies, etc., several postdated employee checks are in the petty cash fund. d. At the end of the day, cash register clerks are required to use their own funds to make up any cash shortages in their registers. e. At the end of each day, all cash receipts are placed in the bank's night depository. f. At the end of each day, an accounting clerk compares the duplicate copy of the daily cash deposit slip with the deposit receipt obtained from the bank. g. All mail is opened by the mail clerk, who forwards all cash remittances to the cashier. The cashier prepares a listing of the cash receipts and forwards a copy of the list to the accounts receivable clerk for recording in the accounts. h. The bank reconciliation is prepared by the cashier, who works under the supervision of the treasurer. Instructions Indicate whether each of the procedures of internal control over cash represents (1) a strength or (2) a weakness. For each weakness, indicate why it exists.
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Sarbanes-Oxley internal control report Using Wikipedia (www.wikipedia.com), look up the entry for Sarbanes-Oxley Act. Look over the table of contents and find the section that describes Section 404. What does Section 404 require of management's internal control report?
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A ? Bank reconciliation The following data were gathered to use in reconciling the bank account of Eves Company: img a. What is the adjusted balance on the bank reconciliation? b. Journalize any necessary entries for Eves Company based on the bank reconciliation. B ? Bank reconciliation The following data were gathered to use in reconciling the bank account of Conway Company: img a. What is the adjusted balance on the bank reconciliation? b. Journalize any necessary entries for Conway Company based on the bank reconciliation.
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The ticket seller at a movie theater doubles as a ticket taker for a few minutes each day while the ticket taker is on a break. Which control procedure of a business's system of internal control is violated in this situation?
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Internal controls Ramona's Clothing is a retail store specializing in women's clothing. The store has established a liberal return policy for the holiday season in order to encourage gift purchases. Any item purchased during November and December may be returned through January 31, with a receipt, for cash or exchange. If the customer does not have a receipt, cash will still be refunded for any item under $75. If the item is more than $75, a check is mailed to the customer. Whenever an item is returned, a store clerk completes a return slip, which the customer signs. The return slip is placed in a special box. The store manager visits the return counter approximately once every two hours to authorize the return slips. Clerks are instructed to place the returned merchandise on the proper rack on the selling floor as soon as possible. This year, returns at Ramona's Clothing have reached an all-time high. There are a large number of returns under $75 without receipts. a. How can salesclerks employed at Ramona's Clothing use the store's return policy to steal money from the cash register? b. What internal control weaknesses do you see in the return policy that make cash thefts easier? c. Would issuing a store credit in place of a cash refund for all merchandise returned without a receipt reduce the possibility of theft? List some advantages and disadvantages of issuing a store credit in place of a cash refund. d. Assume that Ramona's Clothing is committed to the current policy of issuing cash refunds without a receipt. What changes could be made in the store's procedures regarding customer refunds to improve internal control?
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Why should the employee who handles cash receipts not have the responsibility for maintaining the accounts receivable records? Explain.
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Internal controls The following is an excerpt from a conversation between the store manager of Wholesome Grocery Stores, Kara Dahl, and Lynn Shutes, president of Wholesome Grocery Stores: Lynn: Kara, I'm concerned about this new scanning system. Kara: What's the problem? Lynn: Well, how do we know the clerks are ringing up all the merchandise? Kara: That's one of the strong points about the system. The scanner automatically rings up each item based on its bar code. We update the prices daily, so we're sure the sale is rung up for the right price. Lynn: That's not my concern. What keeps a clerk from pretending to scan items and then simply not charging his friends? If his friends were buying 10-15 items, it would be easy for the clerk to pass several items through putting his finger over the bar code or just pass the merchandise through the scanner with the wrong side showing. It would look normal for anyone observing. In the old days, we at least could hear the cash register ringing up each sale. Kara: I see your point. Suggest ways that Wholesome Grocery Stores could prevent or detect the theft of merchandise as described.
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Bank reconciliation and entries The cash account for Stone Systems at July 31 indicated a balance of $17,750. The bank statement indicated a balance of $33,650 on July 31. Comparing the bank statement and the accompanying canceled checks and memos with the records reveals the following reconciling items: a. Checks outstanding totaled $17,865. b. A deposit of $9,150, representing receipts of July 31, had been made too late to appear on the bank statement. c. The bank had collected $6,095 on a note left for collection. The face of the note was $5,750. d. A check for $390 returned with the statement had been incorrectly recorded by Stone Systems as $930. The check was for the payment of an obligation to Holland Co. for the purchase of office supplies on account. e. A check drawn for $1,810 had been incorrectly charged by the bank as $1,180. f. Bank service charges for July amounted to $80. Instructions 1. Prepare a bank reconciliation. 2. Journalize the necessary entries. The accounts have not been closed. 3. If a balance sheet is prepared for Stone Systems on July 31, what amount should be reported as cash?
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Ethics and professional conduct in business Doris Tidwell and Jo Yost are both cash register clerks for Fuller's Organic Markets. Tom Ward is the store manager for Fuller's Organic Markets. The following is an excerpt of a conversation between Doris and Jo: Doris: Jo, how long have you been working for Fuller's Organic Markets? Jo: Almost five years this April. You just started two weeks ago… right? Doris: Yes. Do you mind if I ask you a question? Jo: No, go ahead. Doris: What I want to know is, have they always had this rule that if your cash register is short at the end of the day, you have to make up the shortage out of your own pocket? Jo: Yes, as long as I've been working here. Doris: Well, it's the pits. Last week I had to pay in almost $40. Jo: It's not that big a deal. I just make sure that I'm not short at the end of the day. Doris: How do you do that? Jo: I just shortchange a few customers early in the day. There are a few jerks that deserve it anyway. Most of the time, their attention is elsewhere, and they don't think to check their change. Doris: What happens if you're over at the end of the day? Jo: Tom lets me keep it as long as it doesn't get to be too large. I've not been short in over a year. I usually clear about $20 to $30 extra per day. Discuss this case from the viewpoint of proper controls and professional behavior.
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Why should the responsibility for maintaining the accounting records be separated from the responsibility for operations? Explain.
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(a) Name and describe the five elements of internal control. (b) Is any one element of internal control more important than another?
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