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CHAPTER 8
Fraud, Internal Control, and Cash
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
Exercises
A
Problems
1. Discuss fraud and the
principles of internal
control.
1, 2, 3, 4, 5,
6, 7, 8, 9,
10, 11
1, 2, 3, 4
1
1, 2, 3,
5, 6
1A, 6A
2. Apply internal control
principles
to cash.
6, 13, 14,
15, 16, 17,
18, 19, 21
5, 6, 7, 8, 9
2a, 2b
2, 3, 4, 5,
6, 7, 8
1A, 2A, 6A
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
WEYGANDT ACCOUNTING PRINCIPLES 12E
CHAPTER 8
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
1
C
Simple
3–5
BE5
2
C
Simple
4–6
BE6
2
AP
Simple
4–6
BE10
3
C
Simple
2–4
BE11
3
C
Simple
3–5
BE12
3
C
Simple
3–5
BE13
3
AP
Simple
2–4
BE14
3
AP
Simple
2–4
DI2b
2
AP
Simple
4–6
DI3
3
C
Simple
2–4
DI4
4
K
Simple
2–4
EX1
1
C
Simple
8–10
EX2
1, 2
E
Moderate
8–10
EX3
1, 2
E
Moderate
8–10
EX8
2
AP
Simple
6–8
EX9
3
AN
Simple
8–10
EX10
3
AP
Simple
3–5
FRAUD, INTERNAL CONTROL, AND CASH (Continued)
Number
LO
BT
Difficulty
Time (min.)
EX11
3
AN
Simple
10–12
EX12
3
AN
Simple
12–15
P3A
3
AN
Simple
20–30
P4A
3
AN
Moderate
40–50
P5A
3
AN
Moderate
30–40
P6A
1, 2
E
Complex
35–45
BYP1
1, 4
C
Simple
10–15
BYP2
4
AN
Simple
8–12
BYP3
4
AN
Simple
8–12
BYP4
1, 3
E
Simple
10–15
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems
Learning Objective
Knowledge
Comprehension
Application
Analysis
Synthesis
Evaluation
1. Discuss fraud and the principles
of internal control
Q8-1 Q8-8
Q8-2 Q8-9
Q8-3 Q8-10
Q8-4 Q8-11
Q8-7 BE8-3
BE8-4
DI8-1
E8-1
E8-5
E8-2
E8-3
P8-6A
2. Apply internal control principles
to cash.
Q8-18
Q8-19
Q8-6
Q8-13
Q8-14
Q8-15
Q8-16
Q8-17
Q8-21
BE8-8
BE8-5
DI8-2a
E8-5
E8-6
P8-1A
BE8-6
BE8-7
BE8-9
DI8-2b
E8-7
E8-8
P8-2A
E8-2
E8-3
E8-4
P8-6A
4. Explain the reporting of cash.
Q8-27
DI8-4
Q8-26
BE8-15
E8-14
Q8-12
E8-14
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
to the employer. An example of fraud that might occur at a bank would be a computer operator
embezzling funds by transferring a customer’s deposits into another account.
2. The three main factors that contribute to employee fraud are opportunity, financial pressure, and
rationalization. Opportunities that an employee can take advantage of occur when the workplace
lacks sufficient controls to deter and detect fraud. Financial pressure occurs when employees
want to lead a lifestyle that they cannot afford on their current salary. Rationalization involves
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.
• A control environment. Top management must make it clear that the organization values
integrity and that unethical activity will not be tolerated.
• Risk assessment. Companies must identify and analyze the various factors that create risk
for the business and must determine how to manage these risks.
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,
(c) documentation procedures, (d) physical controls, (e) independent internal verification, and (f) human
resource controls.
6. This is a violation of the internal control principle of establishing responsibility. In this case, each
sales clerk should have a separate cash register or cash register drawer.
7. The two applications of segregation of duties are:
Questions Chapter 8 (Continued)
9. Safes, vaults, and locked warehouses contribute to the safeguarding of company assets. Cash
registers and time clocks contribute to the safeguarding of company assets and accuracy and
reliability of the accounting records, and electronic burglary systems and sensors help to
safeguard assets.
10. (a) Independent internal verification involves the review of data prepared by employees.
(b) Maximum benefit is obtained from independent internal verification when:
(1) The verification is made periodically or on a surprise basis.
11. (a) The concept of reasonable assurance rests on the premise that the costs of establishing
control procedures should not exceed their expected benefit.
(b) The human element is an important factor in a system of internal control. A good system
can become ineffective through employee fatigue, carelessness, or indifference. Moreover,
internal control may become ineffective as a result of collusion.
14. Cash registers are readily visible to the customer. Thus, they prevent the sales clerk from ringing
up a lower amount and pocketing the difference. In addition, the customer receives an itemized
receipt, and the cash register tape is locked into the register for further verification, providing
documentation and enabling independent internal verification.
15. Two mail clerks contribute to a more accurate listing of mail receipts and to the endorsement of
all checks “For Deposit Only.” In addition, two clerks reduce the likelihood of mail receipts being
diverted to personal use because they serve as a check on each other.
18. Physical controls apply to cash disbursements when: (a) blank checks are stored in a safe, and
access to the safe is restricted to authorized personnel, and (b) a checkwriting machine and indelible
ink are used to imprint amounts on checks. Documentation procedures apply when the company
uses prenumbered checks and account for them in sequence, and stamps invoices “paid”.
Questions Chapter 8 (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.
20. Electronic funds transfer is a cash disbursement system that uses wire, telephone, or computers
to transfer cash balances 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.
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.
24. The four steps are: (1) determine deposits in transit, (2) determine outstanding checks, (3) discover
any errors made, and (4) trace bank memoranda.
25. (a) An NSF check occurs when the checkwriter’s bank balance is less than the amount of the check.
(b) In a bank reconciliation, a customer’s NSF check is deducted from the balance per books.
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.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 8-1
1. Financial Pressure
BRIEF EXERCISE 8-2
1. True.
BRIEF EXERCISE 8-3
The purposes of internal control are to:
1. Safeguard a company’s assets from employee theft, robbery, and un-
authorized use. An application for Penny Parking is the use of a cash
register to safeguard assets.
BRIEF EXERCISE 8-4
1. Segregation of duties.
BRIEF EXERCISE 8-5
1. Physical controls.
BRIEF EXERCISE 8-6
(a) Cash ............................................................... 6,820.75
Cash Over and Short .................................... 50.75
BRIEF EXERCISE 8-7
Cash ($1,125.74 – $160.00) ................................... 965.74
BRIEF EXERCISE 8-8
BRIEF EXERCISE 8-9
Mar. 20 Postage Expense .......................................................... 52
BRIEF EXERCISE 8-10
1. A check provides documentary evidence of the payment of a specified
sum of money to a designated payee.
BRIEF EXERCISE 8-11
1. Outstanding checks—deducted from cash balance per bank.
2. Bank service charge—deducted from cash balance per books.
BRIEF EXERCISE 8-12
1. The reconciling items per the books, items (2) and (3) above, will require
adjustment on the books of the depositor.
BRIEF EXERCISE 8-13
Cash balance per bank ..................................................................... $7,420
Add: Deposits in transit ................................................................... 1,620
9,040
BRIEF EXERCISE 8-14
Cash balance per books ................................................................... $9,500
BRIEF EXERCISE 8-15
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 8-1
1. Violates the control activity of documentation procedures. Source docu-
DO IT! 8-1 (Continued)
2. Violates the control activity of segregation of duties. Different individuals
should be responsible for related activities, such as these three related
purchasing activities. Many abuses could occur: placing orders with
3. Violates the control activity of establishment of responsibility. Great
DO IT! 8-2a
All mail receipts should be opened in the presence of two mail clerks. Those
mail clerks should immediately stamp each check “For Deposit Only.” The
mail clerks should prepare, in duplicate, a list of the checks received each
DO IT! 8-2b
Aug. 1 Petty Cash .................................................... 100
Cash ....................................................... 100
31 Postage Expense ......................................... 31
DO IT! 8-3
Roger should treat the reconciling items as follows:
1. Outstanding checks: Deduct from balance per bank.
2. A deposit in transit: Add to balance per bank.
DO IT! 8-4
1. True.
SOLUTIONS TO EXERCISES
EXERCISE 8-1
1. Establishment of responsibility. The counter clerk is responsible for
handling cash. Other employees are responsible for making the pizzas.
2. Segregation of duties. Employees who make the pizzas do not handle cash.
EXERCISE 8-2
(a)
(b)
Procedure
Weakness
Principle
Recommended
Change
1.
Cash is not
adequately
protected
from theft.
Physical
controls.
Cash should be
stored in a safe
until it is deposited
in bank.
EXERCISE 8-2 (Continued)
(a)
(b)
Procedure
Weakness
Principle
Recommended
Change
3.
The accountant
should not
handle cash.
Segregation
of duties.
The cashier’s
department should
make the deposits.
EXERCISE 8-3
(a)
(b)
Procedure
Weakness
Principle
Recommended
Change
1.
The bank
reconciliation
is not
independently
prepared.
Independent
internal
verification.
Someone with no
other cash
responsibilities
should prepare the
bank reconciliation.
EXERCISE 8-3 (Continued)
(a)
(b)
Procedure
Weakness
Principle
Recommended
Change
4.
After payment,
bills are simply
filed in a folder.
Documentation
procedures.
Bills should be stamped
PAID before being placed
in the folder.
EXERCISE 8-4
(a) Weaknesses
(b) Suggested Improvement
1. Checks are not prenumbered.
Use prenumbered checks.
2. The purchasing agent signs
checks.
Only the treasurer’s department
personnel should sign checks.
3. Unissued checks are stored in
unlocked file cabinet.
Unissued checks should be stored
in a locked file cabinet with access
restricted to authorized personnel.
EXERCISE 8-4 (Continued)
(a) Weaknesses
(b) Suggested Improvement
6. The treasurer records the
checks in cash disbursements
journal.
Same as answer to No. 6 above.
(b) To: Treasurer, Danner Company
From: Accounting Student
I have reviewed your cash disbursements system and suggest that you
make the following improvements:
1. Danner Company should use prenumbered checks. These should
be stored in a locked file cabinet or safe with access restricted to
authorized personnel.
EXERCISE 8-5
Procedure
IC good or weak?
Related internal control principle
1.
Weak
Establishment of Responsibility
2.
Good
Independent Internal Verification
EXERCISE 8-6
Procedure
IC good or weak?
Related internal control principle
1.
Good
Human Resource Controls
2.
Weak
Establishment of Responsibility
EXERCISE 8-7
May 1 Petty Cash ...................................................... 100.00
Cash .......................................................... 100.00
June 1 Delivery Expense ........................................... 31.25
EXERCISE 8-8
Mar. 1 Petty Cash................................................................. 100
Cash ................................................................... 100
15 Postage Expense....................................................... 39
Freight-Out ................................................................. 21
EXERCISE 8-9
(a) Cash balance per bank statement .................. $3,560.20
Add: Deposits in transit ................................. 530.00
4,090.20
Less: Outstanding checks ............................. 730.00
Adjusted cash balance per bank .................... $3,360.20
(b) Accounts Receivable ....................................... 490.00
Cash .......................................................... 490.00
