Accounting Chapter 4 Homework But the Auditor Will Lose The Client And Also Lose The Revenue From

(30-45 min.) P 4-53B

Carvel Wireless

Cash Budget

2017

Cash balance, beginning

$ 7,900

Budgeted cash receipts:

Collections from customers ($65,000 × 1.12)

72,800

Receipt of interest

300

81,000

Budgeted cash payments:

Cash paid for inventory ($44,000 × 1.20)

$52,800

Cash paid for operating expenses

13,900

Purchase of equipment

4,400

Purchases of investments

400

Payment of dividends

Payments of long-term debt

Cash available (needed) before financing

Budgeted cash balance, ending

Cash available for additional investments, or

(New financing needed)

Challenge Exercises and Problem

(15-25 min.) E 4-54

Wood could be:

Brown could investigate by:

1.

Writing business checks to

herself.

1.

Performing the bank

reconciliation and examining all

checks written by the business.

2.

Submitting purchase invoices a

second time for duplicate

payment, perhaps altering the

mailing address on the

duplicate invoice and sending

the check to a post office box

that Wood controls.

2.

Examining purchase invoices for

authenticity and comparing

invoices to receiving reports to

determine that the business

received all goods it paid for.

Any invoice with a hole indicates

it was paid earlier.

Calling the suppliers directly to

inquire about any questionable

invoices.

items needed by the business.

Student responses may vary.

(20-30 min.) E 4-55

Req. 1

Dollar Depot, Inc.

Cash Budget

Year Ended December 31, 2017

Thousands

Cash balance, December 31, 2016

$ 100

Budgeted cash receipts:

Collections from customers

20,400

Issuance of stock

647

21,147

Budgeted cash payments:

Purchases of inventory items

$14,445

Payment of operating expenses

2,349

Purchase of property and equipment

1,548

Payment of dividends

Cash available (shortage) before financing

1,598

Budgeted cash balance, December 31, 2017

Cash available for additional investments

$11,588

Req. 3

Dollar Depot will have cash available for additional investments and

should not need to borrow.

(20-30 min.) P 4-56

The Parkview Company

Bank Reconciliation

December 31

BANK:

Balance, December 31

$ 3,936

Add: Deposit in transit

Actual amount of December 30 deposit

670

Subtotal

4,606

Less: Outstanding checks

Check No.

1560

$184

1901

849

1902

168

(1,201)

Adjusted bank balance, December 31

$ 3,405

BOOKS:

Balance, December 31

EFT receipt from customer

Interest revenue

Subtotal

Less: NSF check

EFT payment of utility bill

deposit)

Unexplained difference

Adjusted book balance, December 31

(continued) P 4-56

Checks No. 1880, 1882, and 1883 were outstanding in November so

should not also be deducted from Cash in December. The unexplained

difference of $3,638* consists of: $1,138 erroneous November

outstanding checks and the $2,500 difference between deposit in transit

Decision Cases

(20-30 min.) Decision Case 1

Environmental Concerns, Inc.

Bank Reconciliation

September 30

BANK:

Balance, September 30

$ 8,224

Add: Deposit of September 30 in transit

3,794

Subtotal

12,018

Less: Outstanding checks ($116 + $150 +

$853 + $990 + $206 + $145)

(2,460)

Adjusted bank balance, September 30

$ 9,558

BOOKS:

Balance, September 30

Add: Bank collection

200

Subtotal

10,602

Less: Service charge

NSF check

(44)

Adjusted book balance, September 30

$10,558

Based on the above reconciliation, it appears the bookkeeper has stolen

$1,000, the difference between the adjusted bank and book amounts

(continued) Decision Case 1

Benz should assign an employee with no cash-handling duties to

prepare the bank reconciliation. The bookkeeper should not perform this

duty, because a person who handles cash and also prepares the

reconciliation can steal cash and manipulate the reconciliation to cover

the theft. Perhaps Benz should prepare the reconciliation himself.

Other internal control deficiencies:

1. The bookkeeper should not handle incoming mail. The mailroom

employee should open the mail. The mailroom employee should

(15-30 min.) Decision Case 2

The internal control weakness in this case is a lack of separation of

duties. The foreman performs too many duties.

1. The foreman hires the workers.

2. The foreman controls workers’ employment documents.

3. The foreman fills out workers’ time sheets and transmits all

documents to the home office.

The foreman could steal from the company as follows:

1. The foreman could enter a fictitious worker into the payroll system

and fill out bogus time sheets for the fictitious employee. Then the

foreman could pocket the pay check written to the employee.

The following actions will correct the internal control weakness:

1. The home office could have the construction workers come to the

office for processing their employee documents. Then the home

office would at least know that all the workers exist.

2. Have employees sign their own time sheets.

(continued) Decision Case 2

3. Don’t allow Pickins to pass out paychecks. Have employees pick up

paychecks at corporate office or have another corporate employee go

and pass out paychecks. The check distributor should ask for a

picture identification.

4. Have a home-office employee compare signatures on the workers’

time sheets to their signatures on file and, occasionally, to their

endorsements on the backs of their paychecks.

Ethical Issues

Ethical Issue 1

1. Identify the ethical issue. You must decide whether it is ethical for the

auditor not to require the bank to record the loss.

2. What are the alternatives? Require the client to record the loss, or

permit the client not to record the loss.

3. Identify the stakeholders. The auditor, the bank, and the public at

large can be affected. The auditor’s reputation is on the line. The

bank’s financial statements are in question. The public, including

creditors and investors, can be affected if the bank issues financial

statements that include erroneous amounts.

4. Make the decision. The auditor should require the bank to record the

loss even if that means losing the bank as a client. By sticking to his

or her belief that the bank should record the loss, the auditors’

Ethical Issue 2

1. Identify the ethical issue. Galvin’s ethical issue is whether to use his

knowledge of The Salvation Army’s plans and of Nadar’s situation to

either party’s advantage (or disadvantage). Should Galvin help The

2. What are the alternatives? There are several:

(a) Let other members of the Salvation Army board of directors

know of Nadar’s situation in order to help The Salvation Army

buy the land at a bargain price.

(b) Disclose Nadar’s situation to fellow board members and insist

that The Salvation Army pay market price ($3.6 million) for the

land.

3. Identify the stakeholders involved. Galvin, The Salvation Army,

Nadar, and Community Banks.

Assess the possible consequences. Disclosing Nadar’s weakened

condition to The Salvation Army board may help The Salvation Army

buy the land at a low price, depending on the ethical bearing of

(continued) Ethical Issue 2

fellow board members. This would help The Salvation Army and hurt

Nadar, relative to her ability to sell the land at market value of $3.6

million. Insisting that The Salvation Army offer market price for the

land would seem fair to both parties, but that would betray the trust of

Nadar. And it may or may not sway the board to go along with a $3.6

million offer for the land.

Taking a temporary leave of absence would preserve Galvin’s

integrity and remove him from the conflict of interest. It would also

preserve Galvin’s reputation for fairness and the reputation of

Community Bank for keeping depositor information confidential.

4. Make the decision. The authors would take the leave of absence and

hope other Salvation Army board members do not probe Galvin’s

1. Identify the ethical issue. French’s ethical issue is whether to tell IMS

personnel about Snicker Foods’ possible bankruptcy.

2. What are the alternatives?

3. Identify the stakeholders involved. IMS, Snicker Foods, Community

Bank, and everyone connected to these organizations — owners,

employees, creditors, depositors, and their communities.

4. Make the decision. French should not tell IMS of Snicker’s financial

difficulties (after all, Snicker isn’t bankrupt yet). French should let

nature take its course. Then she will protect the bank’s (and her own)

reputation for keeping client information confidential. In her aiding

Focus on Financials: Apple Inc.

(20-30 min.)

Req. 1

Cash equivalents include assets that are slightly less liquid than cash,

but similar enough to be reported together. Cash equivalents must be

readily convertible to known amounts of cash and close to maturity (with

an original maturity of three months or less at the time of purchase).

Req. 2

Req.3

Yes, Note 2 – Financial Instruments (Cash, Cash Equivalents, and

Marketable Securities) contains more detail about cash equivalents. The

categories are described in two levels. For 2014 and 2013 fiscal year

ends, level one cash equivalents include money market funds. For 2014

Focus on Analysis: Under Armour, Inc.

(20-30 min.)

Req. 1

1. Proceeds from a term loan, which provided $250 million, in the

financing section.

2. Net income of $208 million, in the operating section.

3. Capital spending for property and equipment, which used $141

million, in the investing section.

4. Changes in its accounts receivable, a decrease of $101 million, in

the operating section.

Req. 2

The following items from the report are also mentioned in the chapter:

• “Management is responsible for establishing and maintaining

adequate internal control over financial reporting”. Management

concluded that internal control over financial reporting was

effective as of the end of the year.

• An accounting firm audited the internal controls and reported on

their effectiveness.

Student responses will vary.

Group Project

Student responses will vary.