ch07Solutions.docx
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ch07Solutions.docx
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ch07Solutions
CHAPTER7
InternalControlandCash
StudyObjectives
1.Definefraudandinternalcontrolactivities.
2.Identifytheprinciplesofinternalcontrol.
3.Explaintheapplicationsofinternalcontrolprinciplestocashreceipts.
4.Explaintheapplicationsofinternalcontrolprinciplestocashdisbursements.
5.Prepareabankreconciliation.
6.Explainthereportingofcash.
7.Discussthebasicprinciplesofcashmanagement.
8.Identifytheprimaryelementsofacashbudget.
9.Explaintheoperationofapettycashfund.
SummaryofQuestionsbyStudyObjectivesandBloom’sTaxonomy
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Questions
1.
1
C
7.
2
C
13.
2
C
19.
4
C
24.
7
C
2.
1
C
8.
2
C
14.
6
AP
20.
4
K
25.
5
C
3.
1
C
9.
2
C
15.
3
C
21.
5
K
26.
6
C
4.
1
C
10.
2
C
16.
3
C
22.
5
C
27.
6
C
5.
1
K
11.
2
C
17.
3
C
23.
5
C
28.
9*
C
6.
2
C
12.
2
C
18.
4
C
BriefExercises
1.
1
C
4.
3
C
7
4
C
10.
5
AP
13.
8
AP
2.
2
C
5.
3
AP
8.
5
C
11.
5
AP
14.
9*
AP
3.
2
C
6.
4
C
9.
5
C
12.
6
C
DoItReviewExercises
1.
2
C
2.
3
C
3.
5
K
4.
8
AP
Exercises
1.
2
C
5.
2,4
E
8.
5
AP
11.
5
AP
14.
8
AP
2.
2
C
6.
5
AP
9.
5
AP
12.
6
AP
15.
9*
AP
3.
2,3
E
7.
5
AP
10.
5
AP
13.
7
C
16.
9*
AP
4.
2,4
E
Problems:
SetA
1.
2,3
C
3.
5
AP
5.
5
AP
7.
8
AP
8.
2,3,
4,5
E
2.
2,3,4
C
4.
5
AP
6.
8
AP
Problems:
SetB
1.
2,4
C
3.
5
AP
5.
5
AP
7.
8
AP
8.
2,3,
4,5
E
2.
2,3
C
4.
5
AP
6.
8
AP
ASSIGNMENTCHARACTERISTICSTABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted(min.)
1A
Identifyinternalcontrolweaknessesforcashreceipts.
Simple
20–30
2A
Identifyinternalcontrolweaknessesincashreceiptsandcashdisbursements.
Simple
20–30
3A
Preparebankreconciliationandadjustingentries.
Simple
20–30
4A
Preparebankreconciliationandadjustingentriesfromdetaileddata.
Moderate
40–50
5A
Prepareabankreconciliationandadjustingentries.
Moderate
30–40
6A
Prepareacashbudget.
Moderate
30–40
7A
Prepareacashbudget.
Moderate
30–40
8A
Preparecomprehensivebankreconciliationwiththeftandinternalcontroldeficiencies.
Complex
40–50
1B
Identifyinternalcontrolprinciplesforcashdisbursements.
Simple
20–30
2B
Identifyinternalcontrolweaknessesincashreceipts.
Simple
20–30
3B
Preparebankreconciliationandadjustingentries.
Simple
20–30
4B
Preparebankreconciliationandadjustingentriesfromdetaileddata.
Moderate
40–50
5B
Prepareabankreconciliationandadjustingentries.
Moderate
30–40
6B
Prepareacashbudget.
Moderate
30–40
7B
Prepareacashbudget.
Moderate
30–40
8B
Preparecomprehensivebankreconciliationwiththeftandinternalcontroldeficiencies.
Complex
40–50
ANSWERSTOQUESTIONS
1.Fraudisdishonestactbyanemployeethatresultsinpersonalbenefittotheemployeeatacosttotheemployer.Anexampleoffraudthatmightoccuratabankwouldbeacomputeroperatorembezzlingfundsbytransferringacustomer’sdepositsintoanotheraccount.
2.Thethreemainfactorsthatcontributetoemployeefraudareopportunity,financialpressure,andrationalization.Opportunitiesthatanemployeecantakeadvantageofoccurwhentheworkplacelackssufficientcontrolstodeteranddetectfraud.Financialpressureoccurswhenemployeeswanttoleadalifestylethattheycannotaffordontheircurrentsalary.Rationalizationinvolvesemployeesjustifyingfraudbecausetheybelievetheyareunderpaidwhiletheiremployerismakinglotsofmoney.
3.Thefivecomponentsofagoodinternalcontrolsystemare:
(1)Acontrolenvironment,
(2)Riskassessment,(3)Controlactivities,(4)Informationandcommunication,and(5)Monitoring.
4.Disagree.Internalcontrolisalsoconcernedwiththesafeguardingofcompanyassets,increasingefficiencyofoperations,andensuringcompliancewithlawsandregulations.
5.TheSarbanes-OxleyActrequiresthatacompanydevelopsoundprinciplesofcontroloverfinancialreportingandcontinuallyverifythatthesecontrolsareworking.Theactspecificallyrequirestop
managementtoattestthatthecompany’sinternalcontrolsarereliableandeffective.Inordertoachieveandmaintaintherequiredlevelofcontrol,allemployeesmustbeeducatedwithregardto
internalcontrolprinciplesandevaluatedforcompliancewithexpectedproceduresonaregularbasis.
6.Theprinciplesofinternalcontrolare:
(a)establishmentofresponsibility,(b)segregationofduties,(c)documentationprocedures,(d)physicalcontrols,(e)independentinternalverification,and
(f)humanresourcecontrols.
7.Thisisaviolationoftheinternalcontrolprincipleofestablishingresponsibility.Inthiscase,eachsalesclerkshouldhaveaseparatecashregisterorcashregisterdrawer.
8.Thetwoapplicationsofsegregationofdutiesare:
(1)Theresponsibilityforrelatedactivitiesshouldbeassignedtodifferentindividuals.
(2)Theresponsibilityforrecordkeepingforanassetshouldbeseparatefromthephysicalcustodyofthatasset.
9.Documentationprocedurescontributetogoodinternalcontrolbyprovidingevidenceoftheoccurrenceoftransactionsandeventsand,whensignatures(orinitials)areadded,thedocumentsestablishresponsibilityforthetransactions.Theprompttransmittalofdocumentstoaccountingcontributestorecordingtransactionsintheproperperiod,andtheprenumberingofdocumentshelpstoensurethatatransactionisnotrecordedmorethanonceornotatall.
10.Safes,vaults,andlockedwarehousescontributetothesafeguardingofcompanyassets.Cashregistersandcomputerizedaccountingequipmentcontributetotheaccuracyandreliabilityoftheaccountingrecords,andelectronicburglarysystemsandsensorshelptosafeguardassets.
QuestionsChapter7(Continued)
11.(a)Independentinternalverificationinvolvesthereview,comparison,andreconciliationofdatapreparedbyemployees.
(b)Maximumbenefitisobtainedfromindependentinternalverificationwhen:
(1)Theverificationismadeperiodicallyoronasurprisebasis.
(2)Theverificationisdonebyanemployeewhoisindependentofthepersonnelresponsiblefortheinformation.
(3)Discrepanciesandexceptionsarereportedtoamanagementlevelthatcantakeappropriatecorrectiveaction.
12.(a)Theconceptofreasonableassurancemeansthatthecostsofestablishingcontrolproceduresshouldnotexceedtheirexpectedbenefit.Ordinarily,asystemofinternalcontrolprovidesreasonablebutnotabsoluteassurance,sinceabsoluteassurancewouldbetoocostly.
(b)Thehumanelementisanimportantfactorinasystemofinternalcontrol.Agoodsystemmaybecomeineffectiveastheresultofemployeefatigue,carelessness,orindifference.
Moreover,internalcontrolmaybecomeineffectiveasaresultofcollusion.
13.Thehumanresourcesdepartmentplaysanimportantroleininternalcontrolby
(a)bondingemployeeswhohandlecash,
(b)rotatingemployees’dutiesandrequiringemployeestotakevacations,
(c)conductingthoroughbackgroundchecks.
14.Cashshouldbereportedat$21,100($8,000+$1,100+$12,000).
15.Dailycashcountspertainprimarilytotheprinciplesofsegregationofduties,documentationprocedures,andindependentinternalverification.Dailycashcountsalsoinvolvetheestablishmentofresponsibilityforperformingthecounts.
16.Cashregistersarereadilyvisibletothecustomer.Thus,theypreventthesalesclerkfromringingupaloweramountandpocketingthedifference.Inaddition,thecustomerreceivesanitemizedreceipt,andthecashregistertapeislockedintotheregisterforfurtherverification,providingdocumentationandenablingindependentinternalverification.
17.Twomailclerkscontributetoamoreaccuratelistingofmailreceiptsandtotheendorsementofallchecks“ForDepositOnly.”Inaddition,twoclerksreducethelikelihoodofmailreceiptsbeingdivertedtopersonaluse.
18.True.Paymentbycheckcontributestoeffectiveinternalcontrolovercashdisbursements.However,effectivecontrolisalsopossiblewhensmallpaymentsaremadefrompettycash.
19.Theprocedureandrelatedprincipleare:
Procedure Principle
(1)Treasurersignschecks.Establishmentofresponsibility.
(2)Checksimprintedbyacheckwriter.Physicalcontrols.
(3)ComparingcheckwithapprovedIndependentinternalverification.
invoicebeforesigning.
QuestionsChapter7(Continued)
20.(a)Physicalcontrolsapplytocashdisbursementswhen:
blankchecksarestoredinasafe,andaccesstothesafeisrestrictedtoauthorizedpersonnel,andacheck-writingmachineisusedtoprintamountsoncheckswithindelibleink.
(b)Humanresourcecontrolsapplywhenthecompanybondspersonnelwhohandlecash,requiresemployeestotakevacations,andconductsbackgroundchecks.
21.Electronicfundstransferisacashdisbursementsystemthatuseswire,telephone,orcomputerstotransfercashfromonelocationtoanother.
22.True.Abankcontributessignificantlytointernalcontrolovercashbecauseit:
(1)safeguardscashond
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