4-1
1
EXERCISE 4-15
The three common features of ethical misconduct are:
1. The availability of an opportunity
By arguing that gambling on sports is no different than using accounting
information to buy stock, Jacob is rationalizing gambling, an activity that
EXERCISE 4-16
The memo should contain some of the following information:
Something is considered material if knowing about the problem would
affect the decisions of an average prudent investor. Thus, the concept is
subjective.
a. Since Ms. Norman was not able to complete the audit procedures,
b. The three types of audit opinions are:
1. Unqualified opinion – This is the most desirable type of
2. Adverse opinion – This is the most undesirable type of
opinion. This type of opinion means that something in the
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2
3. Qualified opinion – This type of opinion means that for the
SOLUTIONS TO PROBLEMS
PROBLEM 4-18
a. Separation of duties would have helped to prevent this type of act.
b. Again, separation of duties would help to prevent this type of fraud.
c. Better control procedures could help eliminate this type of act.
Require an authorization for any discounts that are given. Also,
Four Aces
Bank Reconciliation
August 31, 2014
Unadjusted Bank Balance, August 31, 2014
$15,320
Add: Deposit in Transit
4,295
Less: Outstanding Checks
( 5,030)
True Cash Balance, August 31, 2014
$14,585
Unadjusted Book Balance, August 31, 2014
$13,910
Add: Error in recording check for inventory
750
Less: Debit Memo for new checks
(75)
True Cash Balance, August 31, 2014
$14,585
4-3
3
PROBLEM 4-20
Larry’s Auto Supply, Inc.
Bank Reconciliation
May 31, 2014
Unadjusted Bank Balance, May 31, 2014
$8,250
Add: Deposits in Transit
$1,230
Bank Error
720
1,950
Less: Outstanding Checks #3013
420
3054
650
3056
1,830
(2,900)
True Cash Balance, May 31, 2014
$7,300
Unadjusted Book Balance, May 31, 2014
$7,025*
Add: Note Collected by Bank
$ 400
Error in recording payment for utilities
200
600
Less: Collection Fee
15
Bank Service Charge
35
NSF Checks
275
(325)
True Cash Balance, May 31, 2014
$7,300
*Unadjusted cash balance per Larry’s Auto Supply’s books is computed
PROBLEM 4-21
Reconciling Items
Book Balance
Adjusted?
Added or
Subtracted?
a.
Yes
($30)
b.
No
NA
c.
Yes
( $62)
d.
No
NA
e.
No
NA
f.
Yes
($9)
4-4
4
g.
Yes
450
h.
No
NA
PROBLEM 4-22
a.
Sunset Valley Hotel
Bank Reconciliation
July 31, 2014
Unadjusted Bank Balance, July 31, 2014
$14,929
Add: Deposit in Transit
3,550
Less: Outstanding Checks #2353
$1,500
2356
745
(2,245)
True Cash Balance, July 31, 2014
$16,234
Unadjusted Book Balance, July 31, 2014
$13,200
Add: Credit Memo for Collection of Notes
Receivable
3,050
Less: Debit Memo for Printed Checks
(16)
True Cash Balance, July 31, 2014
$16,234
b.
Item No.
Affect on the cash account:
1.
Not affected
2.
Cash is increased
3.
Not affected
4.
Cash is decreased
5.
Not affected
6.
Not affected
PROBLEM 4-23
a.
Pizza Express
Bank Reconciliation
May 31, 2014
4-5
Unadjusted Bank Balance, May 31, 2014
$22,000
Add: Deposit in Transit
4,250
Less: Outstanding Checks
(4,600)
True Cash Balance, May 31, 2014
$21,650
Unadjusted Book Balance, May 31, 2014
$25,000
Add: Credit Memo for Collection of Notes
Receivable
1,815
Less: Debit Memo for Service Charge
$ 30
Debit Memo for Loan Payment
1,000
(1,030)
Subtotal
25,785
Stolen Cash
(4,135)
True Cash Balance, May 31, 2014
$21,650
b. Correcting the amount of outstanding checks from $465 to $4,600
reveals a true cash balance of $21,650. Given the adjusted book
c. Separation of duties and/or oversight by the owner could help to
accounting of the business.PROBLEM 4-24
The three common features of ethical misconduct are:
1. The availability of an opportunity
1. Even though Robert has exceeded his authority, no one has
4-6
6
2. Robert is in a financial bind and does not want to discuss his
3. He rationalizes that his actions do not hurt anyone because the
PROBLEM 4-25
The memo should explain that his confidentiality requirements prohibit
actsPROBLEM 4-26
The memo should contain some of the following points:
1. Neither the CPA firm, a CPA of the firm, nor family members of the
CPA can have any ownership interest in the company it is auditing.
5. The CPA has a legal responsibility to members of the public who
have an interest in the firm being audited. Protection of the public is
a. According to Note 10, “Cash equivalents include highly liquid
investments with an original maturity of three months or less from
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7
b. The two reports are the “Report of Management on Internal
of these reports are on page 31.ATC 4-2
a. (1)
Bank Reconciliation
June 30, 2014
Peach Co.
Apple Co.
Pear Co.
Unadjusted Bank Balance, 6/30
$48,632
$37,176
$24,894
Add: Deposits in Transit
2,500
3,200
4,800
Less: Outstanding Checks
(1,345)
(2,478)
(2,540)
True Cash Balance, 6/30
$49,787
$37,898
$27,154
Unadjusted Book Balance, 6/30
$45,620
$32,450
$23,467
Add: Credit memo for notes rec.
4,500
5,600
3,800
Credit memo for interest earned
42
68
12
Less: NSF Check
(325)
(145)
(90)
Service Charge
(50)
(75)
(35)
True Cash Balance, 6/30
$49,787
$37,898
$27,154
b. The unadjusted cash balance and the ending bank statement
balance will generally be different because of the timing of
transactions occurring for the books and when they are actually
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8
ATC 4-3
This solution is based on Smucker’s Form 10-K for year ended April 30,
2009, filed with the SEC on June 26, 2009.
a. Note 1 on page 47 defines cash and cash equivalents as:
b. The company’s annual report included two reports in which
Report of Management on Internal Control over Financial Reporting
on page 37.
ATC 4-4
Some of the procedures that should be suggested include:
• Separation of duties.
ATC 4-5
a. John’s scheme affects Southeast Industries’ balance sheet in two
ways. Since cash was erroneously paid for Mr. Tyler after his
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9
b. Article I (responsibilities) of the AICPA Code of Professional Conduct
requires members to carry out their responsibilities with sensitive
c. The three elements of the fraud triangle are:
The existence of some form of pressure leading to an incentive –
The availability of an opportunity – John had the opportunity to carry
out his scheme with impunity because of weak internal controls at
indicated by past performance raises and Bill Jameson’s
acknowledgment that John “deserved a raise.” He may have also
ATC 4-5 (cont.)