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PROBLEM 6-21B
a.
Pyle Garage
Bank Reconciliation
March 31, 2016
Unadjusted Bank Balance, March 31, 2016
$16,000.00
Add: Deposit in Transit
2,000.00
Less: Outstanding Checks #1469
$1,500.00
1470
102.00
(1,602.00)
True Cash Balance, March 31, 2016
$16,398.00
Unadjusted Book Balance, March 31, 2016
$16,868.00
Add: Credit Memo for Collection of Accounts
Receivable
175.00
Less: Error in Recording Check #1468
$630.00
Debit Memo for Service Charges
15.00
(645.00)
True Cash Balance, March 31, 2016
$16,398.00
b.
Account Titles
Debit
Credit
Cash
175.00
Accounts Receivable
175.00
Equipment
630.00
Cash
630.00
Bank Service Charge Expense
15.00
Cash
15.00
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PROBLEM 6-22B
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Number
Type of
Event
Common
Stock
+
Retained
Earnings
1.
AE
+−
NA
NA
NA
2.
AU
−
NA
NA
−
3.
AU
−
NA
NA
−
4.
AE
+−
NA
NA
NA
5.
AS
+
NA
NA
+
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PROBLEM 6-23B
a.
BBQ Express
Bank Reconciliation
May 31, 2016
Unadjusted Bank Balance, May 31, 2016
$22,000
Add: Deposit in Transit
4,250
Less: Outstanding Checks
(4,600)
True Cash Balance, May 31, 2016
$21,650
Unadjusted Book Balance, May 31, 2016
$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, 2016
$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
balance of $21,650, there must be $4,135 of cash missing, (i.e., $25,785
− $21,650). The discrepancy was hidden by understating the amount of
outstanding checks, thereby raising the bank balance to equal the
incorrect book balance.
c. Separation of duties and/or oversight by the owner could help to
prevent this type of act. In small businesses with few employees, it
may not be possible to have all the accounting functions separate. In
this case, it is necessary for the owner to take an active role in the
accounting of the business.
PROBLEM 6-24B
a.
Marsh Company
General Journal
Event
Account Titles
Debit
Credit
1.
Petty Cash
250
Cash
250
2.
No Entry
3.
Meals Expense
120
Postage Expense
21
Delivery Expense
93
Cash Short and Over
3
Cash*
237
1.
2.
3.
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PROBLEM 6-24B (cont.)
d.
Effect of Transactions on Financial Statements
Assets
=
Liab.
+
S. Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Petty Cash
=
1.
(250)
+
250
=
NA
+
NA
NA
−
NA
=
NA
NA
2.
NA
+
NA
=
NA
+
NA
NA
−
NA
=
NA
NA
3.
(237)
+
NA
=
NA
+
(237)
NA
−
237
=
(237)
(237) OA
6-7
PROBLEM 6-25B
a. Since Ms. Stevens was not able to complete the audit procedures,
1. Unqualified opinion – This is the most desirable type of
GAAP.
2. Adverse opinion – This is the most undesirable type of
investor.
3. Qualified opinion – This type of opinion means that for the
6-8
ANSWERS TO QUESTIONS – CHAPTER 6
1. The accounting scandals of WorldCom and Enron are partially
2. Internal control is the process designed to ensure reliable financial
3. Section 404 of Sarbanes-Oxley requires a statement of management’s
responsibility for establishing and maintaining adequate internal
4. The five components of COSO’s framework are as follows:
1. Control Environment. The integrity and ethical values of the
2. Risk Assessment. Management’s process of identifying
3. Control Activities. These are the activities usually thought of as
“the internal control.” They include such things as separation of
4. Information and Communication. The internal and external
5. Monitoring. Assessing the quality of a company’s internal
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6. The Enterprise Risk Management (ERM)-An Integrated Framework is
6. Accounting controls are composed of procedures that are designed to
safeguard assets and to ensure that the accounting records contain
7. An effective internal control system should have:
• Separation of duties.
8. Separation of duties is the procedure whereby different individuals
each separately perform the authorization, recording, and custody
9. Quality employees should have the necessary ability to perform the
10. A fidelity bond is insurance that a company can purchase to protect
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11. When employees are not required to take extended periods of leave or
vacation, the employee may be able to cover up illegal or
13. Specific authorizations outline the limitations that apply to different
levels of management. These authorizations generally apply to
specific positions within the organization. For example, sale of major
14. The use of prenumbered documents (i.e., checks, receipts, and
15. Physical controls are designed to safeguard assets. Storerooms
should be kept locked with limited access. Serial numbers on
16. Independent verification of performance provides an objective
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17. Cash includes currency and other items payable on demand such as
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18. Cash is more susceptible to theft and embezzlement because it is not
19. Giving customers receipts helps to prevent theft of cash receipts. Any
missing receipts or quantities of money can be detected on a timely
20. Control procedures over cash receipts include:
• Timely deposits.
21. Procedures that will help protect cash disbursements include making
all disbursements by check, using prenumbered checks kept in a
22. A debit memo included with the bank statement reduces the amount
23. Information usually contained in the bank statement includes:
• The balance of the account at the beginning of the period.
24. The bank‘s balance will be larger than the book balance if there are
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balance will be smaller if the outstanding deposits exceed the
25. The bank reconciliation is a schedule prepared to identify items
26. An outstanding check is a cash disbursement that has been recorded
27. A deposit in transit is a deposit that has been recorded on the
28. A certified check is a check guaranteed by a bank to be a check drawn
29. The amount of a customer check that was deposited and is later
amount).
30. The Cash Short and Over account is an account that is used to record
31. The petty cash fund is a small cash fund that is kept on the premises
32. Examples of expenditures made from a petty cash fund include
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33. A financial statements audit is a detailed examination of a
(CPA).
34. An independent auditor is a CPA who is independent from the client.
client.
35. An error is material if knowing about the error would have affected
36. Unqualified Opinion – Financial statements are in compliance with
GAAP.
Adverse Opinion
–
Financial statements are not in compliance with
GAAP.
37. An unqualified opinion implies that the financial statements are free
38. A disclaimer is issued if the auditor is unable to perform audit
39. An auditor can disclose confidential client information only when
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40. The purpose of internal controls is to reduce the possibility of errors
6-16
SOLUTIONS TO EXERCISES – SERIES A – CHAPTER 6
EXERCISE 6-1A
a. Section 404 of Sarbanes-Oxley requires a statement of
management’s responsibility for establishing and maintaining
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EXERCISE 6-2A
1. Separation of Duties: Whenever possible, the functions of
authorization, recording, and custody should be handled by different
2. Quality of Employees: Employees should be competent and
3. Bonded Employees: Employers should hire employees with high
4. Periods of Absence: Employees should be required to take extended
6. Authority and Responsibility: A clear chain of command should be
7. Prenumbered Documents: The use of prenumbered documents
8. Physical Control: All assets should be properly documented, and
9. Performance Evaluations: A periodic and independent evaluation of
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EXERCISE 6-3A
Separation of duties would have eliminated this problem. Chun should
6-19
EXERCISE 6-4A
By checking Mr. Clark’s references, educational background, etc., and
6-20
EXERCISE 6-5A
a. Cash requires additional control procedures because of its appeal.
Usually possession of cash is presumed ownership. It usually cannot
be traced and one dollar cannot be distinguished from another.
6-21
EXERCISE 6-6A
a. If you are a small business with only two employees, you still need
to implement all of the basic procedures that are possible. You need
to be especially careful about quality of employees, bonded