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CHAPTER 5
INTERNAL CONTROL AND CASH
CLASS DISCUSSION QUESTIONS
1. a. Congress passed the Sarbanes-
Oxley Act because of the Enron,
WorldCom, Tyco, Adelphia, and oth-
er financial scandals that caused
stockholders, creditors, and other in-
2. Internal control is broadly defined as the
3. a. The five elements of internal control
are the control environment, risk as-
and employees about the impor-
tance of controls. Risk assessment
to provide reasonable assurance that
agement with feedback about inter-
nal control.
procedures. Also, rotation helps to disclose any
irregularities that may occur.
5. Authorizing complete control over a sequence of
related operations by one individual presents
ceipts (operations) and maintaining the accounts
receiving, and storing of supplies, increases the
possibility of errors and fraud. The responsibilities
for operations, custody of assets, and accounting
8. The control procedure requiring that responsibility
9. The responsibility for maintaining the accounting
10. Controls that could have prevented or detected
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11. The three documents supporting the
liability are vendor’s invoice, purchase
for the maintenance of the accounting
records (bookkeeping) from the respon-
according to the bank statement. Once identified,
any errors can be corrected.
b. Controls for petty cash include (1) designat-
ing one person who is responsible for the
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EXERCISES
E5–1
Section 404 requires management’s internal control report to do the following:
The complete AICPA summary of Section 404 of Sarbanes-Oxley is as follows:
Section 404: Management Assessment of Internal Controls.
Requires each annual report of an issuer to contain an “internal control re-
port,” which shall:
Each issuer’s auditor shall attest to, and report on, the assessment made by
the management of the issuer. An attestation made under this section shall
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E5–2
E5–3
b. Sherry’s Fashions suffers from inadequate separation of responsibilities for
c. A store credit for any merchandise returned without a receipt would reduce
145
E5–3, Concluded
d. The potential for abuse in the cash refund system could be minimized if
clerks were required to get a supervisor’s authorization for a refund before
E5–4
As an internal auditor, you would probably disagree with the change in policy.
One way to help minimize the risks associated with potential loan defaults is to
146
E5–5
The trading losses show how small lapses in internal control can have large con–
sequences. When the losses became so large they could no longer be hidden, it
E5–6
This is an example of a fraud with significant collusion. Frauds that are perpe-
trated with multiple parties in different positions of control make detecting fraud
147
E5–7
Awesome Sound Inc. should not have relied on the unusual nature of the vendors
and delivery frequency to uncover this fraud. The purchase and payment cycle is
E5–8
a. The most difficult frauds to detect are those that involve a company’s senior
b. Overall, this type of fraud can be stopped if there is a strong oversight of
148
E5–9
a. The sales clerks should not have access to the cash register tapes.
E5–10
Mamma’s Burgers suffers from a failure to separate responsibilities for related
operations.
Mamma’s Burgers could stop this theft by limiting the drive-through clerk to taking
customer orders, entering them on the cash register, accepting the customers’
E5–11
E5–12