Chapter 4
Internal Control & Cash
Short Exercises
(5 min.) S 4-1
Fraud is an intentional misrepresentation of facts, made for the
purpose of persuading another party to act in such a way that causes
injury or damage to that party.
The Three Components of the Fraud Triangle
1. Motive — Fraud generally results from either critical need or greed on
2. Opportunity — The opportunity to commit fraud usually arises
through weak internal controls.
3. Rationalization — The perpetrator(s) is (are) convinced, in their own
(5 min.) S 4-2
Clyde should report the errors to Lusk because Lusk is Clyde’s
(10 min.) S4-3
A computer virus enters program code without your consent and
performs destructive action to your computer files or programs.
(5-10 min.) S 4-4
COMPONENTS OF INTERNAL CONTROL
1. Control environment — Top managers must set the “tone at the top”
to establish a control environment.
5. Information system — Accurate information is essential for success
in business. Accounting information enters and exits through the
information system.
Student responses may vary for the descriptions.
(5-10 min.) S 4-5
Separation of duties is essential for safeguarding assets. The person
Student responses may vary.
(5-10 min.) S 4-6
There are several major internal control procedures as discussed in the
chapter besides separation of duties:
1. Smart hiring practices. The company should be careful to hire both
2. Comparisons and compliance monitoring. No person or department
should be allowed to completely process a transaction from beginning
(continued) S 4-6
5. Proper approvals. No transaction should be processed without
management’s general or specific approval. Generally, the larger the
transaction, the higher the organizational level of approval necessary.
Notice that the first letters of these attributes spell the acronym SCALP.
(20-30 min.) S 4-8
Punching a hole through supporting documents reduces the
opportunity for fraud. Without this control procedure, a dishonest
(10 min.) S 4-9
Vincente Corp.
Bank Reconciliation
August 31, 2014
BANK
BOOKS
Balance, August 31
$4,775
$3,640
Add: Deposit in transit
300
685
5,075
20
4,345
Less:
Outstanding checks
(800)
(15)
(55)
Adjusted bank balance
$4,275
$4,275
Vincente has cash of $4,275.
(5 min.) S 4-10
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Aug.
31
Cash………………………………………..
685
Accounts Receivable…………………
685
Collection on account.
31
Cash………………………………………..
20
Interest Revenue………………………
20
Interest earned on bank balance.
31
Miscellaneous Expense…………………
15
Cash…………………………………….
15
Bank service charge.
31
Accounts Receivable……………………
55
Cash……………………………………..
55
NSF check.
(5 min.) S 4-11
It appears that the employee has stolen $710 (adjusted book balance,
$3,300 − adjusted bank balance, $2,590). The adjusted bank balance is
1. Paying by check carries three controls over cash:
• The check provides a record of the payment.
2. A dishonest purchasing agent could:
Companies avoid this internal control weakness by separating the
following duties related to the purchase of, and payment for, goods:
(5-10 min.) S 4-14
Farm-to-Market (FM)
Cash Budget
Year 2015
Millions
Cash balance, beginning
$ 7
Estimated cash receipts—total
103
110
Estimated cash payments—total
(97)
Cash available (needed) before new financing
13
Budgeted cash balance needed
(11)
Cash available for additional investments
$ 2
(5 min.) S 4-15
“Cash and cash equivalents” includes liquid assets such as time
Exercises
(5-20 min.) E 4-16A
a. Higaredo has access to the cash collected, and he also prepares the
(10 min.) E 4-17A
Cash payments:
a. Strong internal control. There is a good separation of duties.
Cash receipts:
a. Weak internal control. There is not a good separation of duties. The
(10 min.) E 4-18A
To prevent Munson’s embezzlement, Downtown Columbia’s board of
directors could have:
a. Not permitted Munson to write checks for Downtown Columbia.
Instead, appoint a board member to write the checks.
(10-20 min.) E 4-19A
F.L. Callan
Bank Reconciliation
March 31, 2015
BANK:
Balance, March 31
$ 409
Add: Deposit in transit
1,325
Less: Outstanding checks:
Check No.
626
$ 90
627
270
(360)
Adjusted bank balance
$1,374
BOOKS:
Balance, March 31
$1,472
Less:
Correction of book error —
Recorded $81 check as $18
$ 63
NSF check
28
Service charge
7
(98)
Adjusted book balance
$1,374
(10-20 min.) E 4-20A
Ryan Patrick
Bank Reconciliation
June 30, 2014
BANK:
Balance, June 30
$ 750
Add: Deposit in transit
1,765
2,515
Less: Outstanding checks
(610)
Adjusted bank balance
$1,905
BOOKS:
Balance, June 30
$1,876
Add: EFT collection — rent
409
2,285
Less:
Service charge
$ 7
NSF checks
120
Charge for printed checks
10
Correction of book error —
recorded $270 check as $27
243
(380)
Adjusted book balance
$1,905
Patrick’s actual cash balance is $1,905.
(10-15 min.) E 4-21A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
June
30
Cash ……………………………………………………..
409
Rent Revenue ……………………………………
409
EFT collection of rent.
30
Miscellaneous Expense ($7 + $10) …………..
17
Cash…………………………………………………
17
Bank service charge and charge
for printed checks.
30
Accounts Receivable ……………………………..
120
Cash…………………………………………………
120
NSF checks returned by bank.
30
Salary Expense ($270 − $27) …………………..
243
Cash…………………………………………………
243
Correction of book error.
(10-15 min.) E 4-22A
TO: Store Manager
FROM: Student
SUBJECT: Evaluation of internal control and plan for improvement
There is a weakness in internal control over cash receipts. The cash
registers do not keep a record of sales. With no record, there is no way
(10-15 min.) E 4-23A
The main internal control weakness is that the payroll department both
(20-30 min.) E 4-24A
Dexter Communications, Inc.
Cash Budget
Year Ended December 31, 2015
Millions
Cash balance, December 31, 2014
$ 68
Budgeted cash receipts:
Collections from customers
11,325
Sale of assets
157
11,550
Budgeted cash payments:
Payments for cost of
services and products
$6,196
Payments of operating expenses
2,553
Investment in equipment
1,822
Payment of debt
538
Payment of dividends
348
11,457
Cash available (needed) before financing
93
Budgeted cash balance, December 31, 2015
(70)
Cash available for additional investments, or
(New financing needed)
$ 23
Dexter Communications expects to have cash available for additional
investments of $23 million during 2015.
(5-20 min.) E 4-25B
a. Kennedy has access to the cash collected, and he also prepares the
(10 min.) E 4-26B
Cash payments:
a. Strong internal control. There is a good separation of duties.
Supervisors request equipment, and the home office purchases the
equipment.
(10 min.) E 4-27B
To prevent Henry’s embezzlement, Downtown Huntsville’s board of
(10-20 min.) E 4-28B
A.C. Mazanek
Bank Reconciliation
May 31, 2014
BANK:
Balance, May 31
$ 405
Add: Deposit in transit
1,320
Less: Outstanding checks:
Check No.
626
$ 75
627
265
(340)
Adjusted bank balance
$1,385
BOOKS:
Balance, May 31
$1,452
Less:
Correction of book error —
Recorded $85 check as $58
$ 27
NSF check
37
Service charge
3
(67)
Adjusted book balance
$1,385