CHAPTER 7
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
6, 13, 14,
15, 16, 17,
5, 6, 7, 8, 9
2
2, 3, 4, 5, 6
1A, 2A, 6A
20, 22, 23,
10, 11, 12
9, 10, 11,
3A, 4A, 5A
12, 26, 27
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
5A
Prepare a bank reconciliation and adjusting entries.
30–40
and cash disbursements.
WEYGANDT FINANCIAL AND MANAGERIAL ACCOUNTING 2E
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
DI1
1
C
Moderate
6–8
DI2
2
C
Simple
4–6
DI3
3
AP
Simple
4–6
DI4
4
C
Simple
2–4
EX1
1
C
Simple
8–10
EX2
1, 2
E
Moderate
8–10
EX3
1, 2
E
Moderate
8–10
EX4
2
E
EX5
C
Simple
6–8
EX6
C
Simple
6–8
EX7
2
Simple
8–10
EX8
2
AP
Simple
6–8
EX9
3
Simple
8–10
EX10
3
Simple
3–5
BE4
1
C
Simple
3–5
BE5
2
C
Simple
4–6
BE6
2
AP
Simple
4–6
BE7
2
AP
Simple
2–4
BE8
2
C
Simple
4–6
BE9
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
Simple
2–4
BE15
4
C
Simple
2–4
FRAUD, INTERNAL CONTROL, AND CASH (Continued)
Number
LO
BT
Difficulty
Time (min.)
EX11
3
AN
Simple
10–12
EX12
3
AN
Simple
12–15
EX13
3
AN
Moderate
10–12
EX14
4
C, AP
Simple
8–10
P1A
1, 2
C
Simple
20–30
P2A
2
AP
Simple
20–30
P3A
3
AN
Simple
20–30
P4A
3
AN
Moderate
40–50
P5A
3
AN
Moderate
30–40
P6A
35–45
1, 4
C
Simple
10–15
4
AN
Simple
4
AN
Simple
8–12
1, 3
E
Simple
10–15
2
AN
Moderate
15–20
2
Simple
10–15
2
E
Simple
10–15
E
Simple
10–15
4
AP
Simple
10–15
BLOOM’ S TAXONOMY TABLE
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
Q8-5 BE8-1
Q8-6 BE8-2
BE8-4
D18-1
E8-1
E8-5
E8-6
P8–1A
E8-2
E8-3
P8–6A
DI8-4
Organization
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.
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,
Questions Chapter 7 (Continued)
9. Safes, vaults, and locked warehouses contribute to the safeguarding of company assets. Cash
15. Two mail clerks contribute to a more accurate listing of mail receipts and to the endorsement of
Questions Chapter 7 (Continued)
19. (a) A voucher system is a network of approvals by authorized individuals acting independently
22. Yes. A bank contributes significantly to internal control over cash because it: (1) safeguards cash
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 7-1
BRIEF EXERCISE 7-2
BRIEF EXERCISE 7-3
The purposes of internal control are to:
BRIEF EXERCISE 7-4
BRIEF EXERCISE 7-5
BRIEF EXERCISE 7-6
BRIEF EXERCISE 7-7
BRIEF EXERCISE 7-8
BRIEF EXERCISE 7-9
BRIEF EXERCISE 7-10
BRIEF EXERCISE 7-11
BRIEF EXERCISE 7-12
BRIEF EXERCISE 7-13
BRIEF EXERCISE 7-14
BRIEF EXERCISE 7-15
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 7-1
DO IT! 7-1 (Continued)
DO IT! 7-2A
DO IT! 7-2B
DO IT! 7-3
Roger should treat the reconciling items as follows:
DO IT! 7-2A
SOLUTIONS TO EXERCISES
EXERCISE 7-1
EXERCISE 7-2
(a)
(b)
Procedure
Weakness
Principle
Recommended
Change
from theft.
in bank.
a specific clerk.
for each clerk.
EXERCISE 7-2 (Continued)
(a)
(b)
Procedure
Weakness
Principle
Recommended
Change
EXERCISE 7-3
(a)
(b)
Procedure
Weakness
Principle
Recommended
Change
independently
should prepare the
bank reconciliation.
individual.
and issue checks.
not stored in
a secure area.
controls.
stored in a safe or
locked file drawer.
should not
handle cash.
of duties.
department should
make the deposits.
independently
counted.
internal
verification.
supervisor should
count cash.
Cashiers are
not bonded.
Human resource
controls.
All cashiers should
be bonded.
EXERCISE 7-3 (Continued)
(a)
(b)
Procedure
Weakness
Principle
Recommended
Change
EXERCISE 7-4
(a) Weaknesses
(b) Suggested Improvement
Use prenumbered checks.
restricted to authorized personnel.
before being placed in the folder.
PAID.
personnel should record cash
disbursements.
bills are simply
filed in a folder.
procedures.
PAID before being placed
in the folder.
accounted for.
EXERCISE 7-4 (Continued)
(a) Weaknesses
(b) Suggested Improvement
reconcile the bank statement.
EXERCISE 7-5
Procedure
IC good or weak?
Related internal control principle
EXERCISE 7-6
Procedure
IC good or weak?
Related internal control principle
Human Resource Controls
Segregation of Duties
EXERCISE 7-7
Segregation of Duties
EXERCISE 7-8
EXERCISE 7-9
EXERCISE 7-10
The outstanding checks are as follows:
EXERCISE 7-11
(a) CRANE VIDEO COMPANY
Bank Reconciliation
July 31
EXERCISE 7-12
(a) MINTON COMPANY
Bank Reconciliation
September 30
EXERCISE 7-13
EXERCISE 7-13 (Continued)
EXERCISE 7-14
SOLUTIONS TO PROBLEMS
PROBLEM 7-1A
Principles
Application to Cash Disbursements
PROBLEM 7-2A
(b)
Petty Cash
Date
Explanation
Ref.
Debit
Credit
Balance
PROBLEM 7-2A (Continued)
(c) The internal control features of a petty cash fund include:
PROBLEM 7-3A
(a) REBER COMPANY
Bank Reconciliation
May 31, 2017
PROBLEM 7-4A
(a) LANGER COMPANY
Bank Reconciliation
December 31, 2017
PROBLEM 7-5A
(a) RODRIGUEZ COMPANY
Bank Reconciliation
July 31, 2017
PROBLEM 7-5A (Continued)
PROBLEM 7-6A
Matt has created a situation that leaves many opportunities for undetected
theft. Here is a list of some of the deficiencies in internal control. You may
find others.
1. Documentation procedures. The tickets were unnumbered. By numbering
4. Documentation procedures. There was no control over unsold tickets.
This deficiency made it possible for students to sell the tickets, keep
PROBLEM 7-6A (Continued)
7. Segregation of duties. Jeff Kenney counted the funds, made out the
COMPREHENSIVE PROBLEM SOLUTION
COMPREHENSIVE PROBLEM SOLUTION (Continued)
(b) & (e) General Ledger
COMPREHENSIVE PROBLEM SOLUTION (Continued)
(c) FULLERTON COMPANY
Bank Reconciliation
December 31, 2017
COMPREHENSIVE PROBLEM SOLUTION (Continued)
(f) FULLERTON COMPANY
Adjusted Trial Balance
December 31, 2017
(g) FULLERTON COMPANY
Income Statement
For the Month Ending December 31, 2017
COMPREHENSIVE PROBLEM SOLUTION (Continued)
(g) FULLERTON COMPANY
Balance Sheet
December 31, 2017
BYP 7-1 FINANCIAL REPORTING PROBLEM
(a) In the Report, it states that “the financial statements referred to above
(d) The Company’s management is responsible for establishing and
BYP 7-2 COMPARATIVE ANALYSIS PROBLEM
PepsiCo
Coca-Cola
BYP 7-3 COMPARATIVE ANALYSIS PROBLEM
Amazon
Wal-Mart
BYP 7-4 REAL-WORLD FOCUS
(a) The system of internal control should be evaluated by: (1) responsible
BYP 7-5 DECISION MAKING ACROSS THE ORGANIZATION
(a) The weaknesses in internal accounting control over collections are:
(1) Each usher could take cash from the collection plates enroute to the
(c) The policies that should be changed are:
BYP 7-6 COMMUNICATION ACTIVITY
Mr. Danny Peak
Pritchard Company
Main Street, USA
Dear Mr. Peak:
During our audit of your financial statements, we reviewed the internal con–
trols over cash receipts. The weaknesses we discovered and our suggested
improvements are listed below.
Weaknesses
Suggested Improvement
BYP 7-6 (Continued)
Weaknesses
Suggested Improvement
BYP 7-7 ETHICS CASE
(a) You, as assistant controller, may suffer some negative effects from Lisa
BYP 7-8 ALL ABOUT YOU
BYP 7-9 FASB CODIFICATION ACTIVITY
(b) Cash equivalents are short-term, highly liquid investments that have
both of the following characteristics:
BYP 7-9 (Continued)
(c) Cash and cash items. Separate disclosure shall be made of the cash and
IFRS EXERCISES
IFRS7-1
Companies listed on U.S. stock exchanges must comply with the Sarbanes-
IFRS7-2
IFRS7-3 INTERNATIONAL FINANCIAL REPORTING PROBLEM
(b) The key control procedures include