1. a. The five elements of internal control are the control environment, risk assessment, control
p
rocedures, monitoring, and information and communication. The control environment
is the overall attitude of management and employees about the importance of controls.
2. To reduce the possibility of errors and embezzlement, the functions of operations and
3. The control procedure requiring that responsibility for a sequence of related operations be
4. The responsibility for maintaining the accounting records should be separated from the
5. Controls that could have prevented or detected the fraud include (1) requiring supporting
p
6. The three documents supporting the liability are the vendor’s invoice, the purchase order, and
7. The cash balance and the bank statement balance are likely to differ because of (1) a delay by
8. The purpose of a bank reconciliation is to determine the reasons for the difference between the
b
b
CHAPTER 8
SARBANES-OXLEY, INTERNAL CONTROL, AND CASH
DISCUSSION QUESTIONS
8-1
p
CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
DISCUSSION QUESTIONS (Continued)
9. a. Yes. Even though the petty cash fund is only $750, if the fund is replenished frequently, a
8-2
CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
PE 8–1A
PE 8–1B
PE 8–2A
Appears on the Bank Increases or Decreases
Statement as a Debit the Balance of the
or Credit Memo Company’s Bank Account
PE 8–2B
Appears on the Bank Increases or Decreases
Statement as a Debit the Balance of the
or Credit Memo Company’s Bank Account
credit memo increases
1
Item No.
PRACTICE EXERCISES
Item No.
CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
PE 8–3A
PE 8–3B
PE 8–4A
PE 8–4B
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CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
PE 8–5A
b. The preceding computations indicate that Otto Company has 7.3 months
PE 8–5B
a. Monthly Cash Expenses = Negative Cash Flow from Operations
12 months
Negative Cash Flow from Operations
12 months
=Monthly Cash Expensesa.
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CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
Ex. 8–1
Section 404 requires management’s internal control report to:
(1) state the responsibility of management for establishing and maintaining
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
report,” which shall:
(1) state the responsibility of management for establishing and maintaining
EXERCISES
8-6
CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
Ex. 8–2
a. Agree. Madonna has made one employee responsible for the cash drawer in
accordance with the internal control principle of assignment of responsibility.
Ex. 8–3
a. The sales clerks could steal money by writing phony refunds and pocketing
the cash supposedly refunded to these fictitious customers.
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CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
Ex. 8–3 (Concluded)
d. The potential for abuse in the cash refund system could be eliminated if
clerks were required to get a supervisor’s authorization for a refund before
giving the customer the cash. The supervisor should only authorize the
Ex. 8–4
As an internal auditor, you would probably disagree with the change in policy.
Pacific Bank has some normal business risk associated with default on bank
loans. One way to help minimize this is to carefully evaluate loan applications.
Large loans present greater risk in the event of default than do smaller loans.
Thus, it is reasonable to have more than one person involved in making the
decision to grant a large loan. In addition, loans should be granted on their
merits, not on the basis of favoritism or mere association with the bank president.
Allowing the bank president to have sole authority to grant large loans can lead
to the president granting loans to friends and business associates, without the
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CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
Ex. 8–5
The Societe Generale trading losses show how small lapses in internal control can
have large consequences. When the losses became so large that they could no
longer be hidden, it was too late. The loss could have been avoided with a number
Ex. 8–6
This is an example of a fraud with significant collusion. Frauds that are
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CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
Ex. 8–7
All-Around Sound Co. should not have relied on the unusual nature of the vendors and
delivery frequency to uncover this fraud. The purchase and payment cycle is one
of the most critical business cycles to control, because the potential for abuse is
Ex. 8–8
a. The most difficult frauds to detect are those that involve the senior management
of a company that is in a conspiracy to commit the fraud. The senior managers
b. Overall, this type of fraud can be stopped if there is a strong oversight of senior
management, such as an audit committee of the board of directors. Individual
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CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
Ex. 8–9
a. The sales clerks should not have access to the cash register tapes.
Ex. 8–10
Big & Bad Burgers suffers from a failure to separate responsibilities for related
operations.
Big & Bad Burgers could stop this theft by limiting the drive-through clerk to taking
customer orders, entering them on the cash register, accepting the customers’
payments, returning customers’ change, and handing customers their orders that
another employee has assembled. By making another employee responsible for
Ex. 8–11
a. The remittance advices should not be sent to the cashier.
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CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
Ex. 8–12
Cash 114,850
Ex. 8–14
The use of the voucher system is appropriate, the essentials of which are outlined
below. (Although invoices could be used instead of vouchers, the latter more
satisfactorily provide for account distribution, signatures, and other significant
data.)
1. Each voucher should be approved for payment by a designated official only
after completion of the following verifications: (a) that prices, quantities, terms,
2. The file for unpaid vouchers should be composed of 31 compartments, one for
3. Each day, the vouchers should be removed from the appropriate section of
4. At the time of payment, all vouchers and supporting documents should be
stamped or perforated “Paid” to prevent their resubmission for payment.
They should then be filed in numerical sequence for future reference. The
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CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
Ex. 8–15
To prevent the fraud scheme described, Paragon Tech must separate responsibilities
for related operations. As in the past, all service requisitions should be submitted
Ex. 8–16
Ex. 8–17
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CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
Ex. 8–18
a.
Cash balance according to bank statement $38,280
Add deposit in transit, not recorded by bank 5,850
Ex. 8–19
Cash 630
ALLENBY CO.
Bank Reconciliation
August 31, 20—
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CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
Ex. 8–21
a.
Cash balance according to bank statement $20,300
Add: Deposit in transit on July 31 7,200
Ex. 8–22
CHESNER CO.
Bank Reconciliation
July 31, 2014
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CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
Ex. 8–22 (Concluded)
A correct bank reconciliation would be as follows:
Cash balance according to bank statement $16,185
POWAY CO.
Bank Reconciliation
June 30, 2014
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CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
Ex. 8–23
a. The amount of cash receipts stolen by the sales clerk can be determined by
attempting to reconcile the bank account. The bank reconciliation will not
reconcile by the amount of cash receipts stolen. The amount stolen by the
sales clerk is $4,135, determined as shown below.
Cash balance according to bank statement $13,275
Deduct: Outstanding checks 3,670
b. The theft of the cash receipts might have been prevented by having more than
ALASKA IMPRESSIONS CO.
Bank Reconciliation
October 31, 2014
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CHAPTER 8 Sarbanes-Oxley, Internal Control, and Cash
Ex. 8–24
a. Petty Cash 900
Ex. 8–25
Toy manufacturers and retailers experience a seasonal trend in cash flows from
Ex. 8–26
Ex. 8–27
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