CHAPTER 7
Fraud, Internal Control, and Cash
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
A
Problems
B
Problems
1. Define fraud and internal
control.
1, 2, 3, 4
1, 2, 3
2. Identify the principles of
internal control activities.
5, 6, 7, 8,
9, 10, 11
4
1
1A, 6A
1B, 6B
3. Explain the applications of
internal control principles
to cash receipts.
6, 13, 14,
15
5, 6, 7
2
6A
1B, 6B
4. Explain the applications of
internal control principles
to cash disbursements.
16, 17,
18, 19
8
1A, 6A
6B
5. Describe the operation
of a petty cash fund.
21
9
3
2A
2B
6. Indicate the control features
of a bank account.
22
10
7. Prepare a bank reconciliation.
20, 23,
24, 25
11, 12
13, 14
4
9, 10, 11,
12, 13
3A, 4A,
5A
3B, 4B,
5B, 6B
8. Explain the reporting
of cash.
12, 26, 27
15
14
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Identify internal control principles over cash disbursements.
Simple
20–30
2A
Journalize and post petty cash fund transactions.
Simple
20–30
3A
Prepare a bank reconciliation and adjusting entries.
Simple
20–30
4A
Prepare a bank reconciliation and adjusting entries
from detailed data.
Moderate
40–50
5A
Prepare a bank reconciliation and adjusting entries.
Moderate
30–40
6A
Identify internal control weaknesses in cash receipts
and cash disbursements.
Complex
35–45
1B
Identify internal control weaknesses over cash receipts.
Simple
20–30
2B
Journalize and post petty cash fund transactions.
Simple
20–30
3B
Prepare a bank reconciliation and adjusting entries.
Simple
20–30
4B
Prepare a bank reconciliation and adjusting entries
from detailed data.
Moderate
40–50
5B
Prepare a bank reconciliation and adjusting entries.
Moderate
30–40
6B
Prepare comprehensive bank reconciliation with theft
and internal control deficiencies.
Complex
40–50
WEYGANDT FINANCIAL ACCOUNTING 9E
CHAPTER 7
FRAUD, INTERNAL CONTROL, AND CASH
Number
LO
BT
Difficulty
Time (min.)
BE1
1
C
Simple
2–4
BE2
1
C
Simple
2–4
BE3
1
C
Simple
4–6
BE4
2
C
Simple
3–5
BE5
3
C
Simple
4–6
BE6
3
AP
Simple
4–6
BE7
3
AP
Simple
2–4
BE8
4
C
Simple
4–6
BE9
5
AP
Simple
4–6
BE10
6
C
Simple
2–4
BE11
7
C
Simple
3–5
BE12
7
C
Simple
3–5
BE13
7
AP
Simple
2–4
BE14
7
AP
Simple
2–4
BE15
8
C
Simple
2–4
DI1
2
C
Moderate
6–8
DI2
3
C
Simple
4–6
DI3
5
AP
Simple
4–6
DI4
7
C
Simple
2–4
EX1
2
C
Simple
8–10
EX2
2, 3
E
Moderate
8–10
EX3
2, 4
E
Moderate
8–10
EX4
4
E
Moderate
12–15
EX5
2–4
C
Simple
6–8
EX6
2–4
C
Simple
6–8
EX7
5
AP
Simple
8–10
EX8
5
AP
Simple
6–8
EX9
7
AN
Simple
8–10
EX10
7
AP
Simple
3–5
FRAUD, INTERNAL CONTROL, AND CASH (Continued)
Number
LO
BT
Difficulty
Time (min.)
EX11
7
AN
Simple
10–12
EX12
7
AN
Simple
12–15
EX13
7
AN
Moderate
10–12
EX14
8
C, AP
Simple
8–10
P1A
2, 4
C
Simple
20–30
P2A
5
AP
Simple
20–30
P3A
7
AN
Simple
20–30
P4A
7
AN
Moderate
40–50
P5A
7
AN
Moderate
30–40
P6A
2–4
E
Complex
35–45
P1B
2, 3
E
Simple
20–30
P2B
5
AP
Simple
20–30
P3B
7
AN
Simple
20–30
P4B
7
AN
Moderate
40–50
P5B
7
AN
Moderate
30–40
P6B
2–4, 7
E
Complex
40–50
BYP1
2, 8
C
Simple
10–15
BYP2
8
AN
Simple
8–12
BYP3
8
AN
Simple
8–12
BYP4
2, 7
E
Simple
10–15
BYP5
3
AN
Moderate
15–20
BYP6
3
E
Simple
10–15
BYP7
3
E
Simple
10–15
BYP8
—
E
Simple
10–15
BYP9
8
AP
Simple
10–15
Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Solutions Manual (For Instructor Use Only) 7-5
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End–of-Chapter Exercises and Problems
Learning Objective
Knowledge
Comprehension
Application
Analysis
Synthesis
Evaluation
1. Define fraud and internal
control.
Q7-1
Q7-2
Q7-3
Q7-4
BE7-1
BE7-2
BE7-3
2. Identify the principles of internal
control activities.
Q7-5
Q7-6
Q7-7
Q7-8
Q7-9
Q7–10
Q7–11
BE7-4
DI7-1
E7-1
E7-5
E7-6
P7–1A
E7-2
E7-3
P7–6A
P7–1B
P7–6B
3. Explain the applications of
internal control principles
to cash receipts.
Q7-6
Q7–13
Q7–14
Q7–15
BE7-5
DI7-2
E7-5
E7-6
BE7-6
BE7-7
E7-2
P7–6A
P7–1B
P7–6B
4. Explain the applications of
internal control principles
to cash disbursements.
Q7–18
Q7–19
Q7–16
Q7–17
BE7-8
E7-5
E7-6
P7–1A
E7-3
E7-4
P7–6A
P7–6B
5. Describe the operation of a
petty cash fund.
Q7–21
BE7-9
DI7-3
E7-7
E7-8
P7–2A
P7–2B
6. Indicate the control features
of a bank account.
Q7–22
BE7-10
7. Prepare a bank reconciliation.
Q7–20
Q7–24
Q7–23
Q7–25
BE7-11
BE7-12
DI7-4
BE7-13
BE7-14
E7–10
E7-9
E7–11
E7–12
E7–13
P7–3A
P7–4A
P7–5A
P7–3B
P7–4B
P7–5B
P7–6B
8. Explain the reporting of cash.
Q7–27
Q7–26
BE7-15
E7–14
Q7–12
E7–14
Broadening Your Perspective
Financial Reporting
FASB
Codification
Comparative Analysis
Decision Making
Across the Organization
Real-World Focus
Communication
Ethics Case
All About You
BLOOM’S TAXONOMY TABLE
ANSWERS TO QUESTIONS
1. Fraud is dishonest act by an employee that results in personal benefit to the employee at a cost
2. The three main factors that contribute to employee fraud are opportunity, financial pressure, and
employees justifying fraud because they believe they are underpaid while their employer is
making lots of money.
3. The five components of a good internal control system are: (1) A control environment, (2) Risk
assessment, (3) Control activities, (4) Information and communication, and (5) Monitoring.
Control activities. To reduce the occurrence of fraud, management must design policies
and procedures to address the specific risks faced by the company.
communicate information to appropriate external parties.
Monitoring. Internal control systems must be monitored periodically for their adequacy.
Significant deficiencies need to be reported to top management and/or the board of
directors.
4. Disagree. Internal control is also concerned with the safeguarding of company assets from employee
theft, robbery, and unauthorized use.
5. The principles of internal control are: (a) establishment of responsibility, (b) segregation of duties,
resource controls.
6. This is a violation of the internal control principle of establishing responsibility. In this case, each
7. The two applications of segregation of duties are:
of that asset.
8. Documentation procedures contribute to good internal control by providing evidence that transac-
tions and events have occurred and, when signatures (or initials) are added, the documents
Questions Chapter 7 (Continued)
9. Safes, vaults, and locked warehouses contribute to the safeguarding of company assets. Cash
registers and time clocks contribute to the accuracy and reliability of the accounting records, and
10. (a) Independent internal verification involves the review of data prepared by employees.
(b) Maximum benefit is obtained from independent internal verification when:
for the information.
(3) Discrepancies and exceptions are reported to a management level that can take appropriate
corrective action.
11. (a) The concept of reasonable assurance rests on the premise that the costs of establishing
internal control may become ineffective as a result of collusion.
12. Cash should be reported at $22,850 ($8,000 + $850 + $14,000).
13. Daily cash counts pertain primarily to the principles of segregation of duties, documentation
of responsibility for performing the counts.
14. Cash registers are readily visible to the customer. Thus, they prevent the sales clerk from ringing
documentation and enabling independent internal verification.
15. Two mail clerks contribute to a more accurate listing of mail receipts and to the endorsement of
16. Payment by check contributes to effective internal control over cash disbursements. However,
17. The procedure and related principle are:
Procedure Principle
(1) Treasurer signs checks. * Establishment of responsibility.
indelible ink.
(3) Comparing check with approved * Independent internal verification.
invoice before signing.
18. Physical controls apply to cash disbursements when: (a) blank checks are stored in a safe, and
Questions Chapter 7 (Continued)
19. (a) A voucher system is a network of approvals by authorized individuals acting independently
to ensure that all disbursements by check are proper.
(b) The internal control principles applicable to a voucher system are: (1) establishment of res–
ponsibility, (2) segregation of duties, (3) independent internal verification, and (4) documentation
procedures.
20. Electronic funds transfer is a cash disbursement system that uses wire, telephone, or computers
to transfer cash from one location to another.
21. The activities in a petty cash system and the related principles are:
(a) (1) Establishing the fund. * Establishment of responsibility for custody of fund.
(2) Making payments from the fund. * Documentation procedures because the custodian
must use a prenumbered petty cash receipt.
(3) Replenishing the fund. * Independent internal verification because the re-
quest for replenishment must be approved before
the check is written.
(b) Journal entries are required for a petty cash fund when it is established and replenished.
Entries are also required when the size of the fund is increased or decreased.
22. Yes. A bank contributes significantly to internal control over cash because it: (1) safeguards cash
on deposit, (2) minimizes the amount of currency that must be kept on hand, and (3) provides a
double record of all bank transactions.
23. The lack of agreement between the balances may be due to either:
(1) Time lags—a check written in July does not clear the bank until August.
(2) Errors—a check for $110 is recorded by the depositor at $101.
24. The four steps are: (1) determine deposits in transit, (2) determine outstanding checks, (3) discover
any errors made, and (4) trace bank memoranda.
Receivable and a credit to Cash.
26. (a) Yes. Cash equivalents are highly liquid investments that can be converted into a specific
amount of cash with maturities of three months or less when purchased. Cash equivalents
may be reported with cash in the current assets section of the balance sheet.
27. Apple reports cash and cash equivalents of $9,815 million in its 2011 consolidated balance sheet.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 7-1
BRIEF EXERCISE 7-2
BRIEF EXERCISE 7-3
The purposes of internal control are to:
register to safeguard assets.
2. Enhance the accuracy and reliability of a company’s accounting records
3. Increase efficiency of operations. An application is assignment of
responsibility to specific employees.
4. Ensure compliance with laws and regulations. An application is use of
All of these purposes are important to the success of any business endeavor.
BRIEF EXERCISE 7-4
BRIEF EXERCISE 7-5
BRIEF EXERCISE 7-6
(a) Cash ……………………………………………………… 6,820.75
(b) Cash ……………………………………………………… 6,899.82
BRIEF EXERCISE 7-7
Cash ($1,125.74 – $160.00) …………………………….. 965.74
BRIEF EXERCISE 7-8