E 7-1

Toshima’s internal control weakness was a lack of separation of duties. The article states that "Takeda admitted to concealing the losses by falsifying Toshima’s books and records." Obviously Mr. Takeda, a copper trader, also had access to the accounting records for his own trades.

Toshima could have avoided the losses by denying Takeda access to the accounting records. This would have prevented him from falsifying the records and probably would have brought the losses to light earlier. Also, Toshima could have kept the losses from growing so large by having a supervisor review Takeda’s work and trace his trades to the related accounting records to ensure that the records agreed with details of Takeda’s trades.

(10 min.) E 7-2

Cash Receipts:

a. Weak internal control. The accountant both handles cash and accounts for cash.

b. Strong internal control. There is a good separation of duties. Different people handle cash and account for cash.

 

Equipment Purchases:

a. Strong internal control. There is a good separation of duties.

Supervisors request equipment, and the home office purchases the equipment.

b. Weak internal control. Supervisors request, purchase, and pay for equipment, with little oversight by the home office.

 

 

(10 min.) E 7-3

  1. Weakness. The sales clerk should not have access to the control tape because he or she could steal cash and delete a cash receipt from the tape.
  2. Weakness. The vice-president should examine the payment packet to ensure that the payment is valid and for the correct amount. Note: He or she may have to do this on a sample basis if there is a large number of checks to sign.
  3. Weakness. The control environment will not be as effective as it would be if top management led in establishing internal controls.
  4. Weakness. The accounting department should not be allowed to order merchandise. An accountant could have goods sent to a location he or she controls, then approve payment for the goods.
  5. Strength. The computer operator cannot steal cash because he or she does not handle the cash of the business.

 

 

 

(10 min.) E 7-4

The missing internal control characteristic in each situation is:

  1. Other controls (not depositing cash frequently enough for adequate security).
  2. Separation of duties (same person ordering merchandise and approving payment).
  3. Separation of duties (same person selling tickets and taking tickets).
  4. Other controls (not pricing at odd amounts to require that change be made and force the sale to be entered on the cash register’s tape).
  5. Documents and records (no receiving report).

(20 min.) E 7-5

a. Managers are more concerned about safeguarding assets because most businesses cannot operate without assets. At a minimum, the business needs cash to purchase goods for resale and to pay employee salaries and other bills. Managers must safeguard the company’s assets, or it will go out of business.

Auditors are more concerned about the quality of the accounting records for two reasons. The final product of the records is the set of financial statements on which the auditors express an opinion. To arrive at the opinion, the auditors must rely on accounting records. If the records are reliable, auditors do not have to examine every transaction and can thus reduce the cost of the audit.

b. Separation of duties is important because it limits the chances for fraud (loss of assets) and also promotes the accuracy of accounting records. This allows managers to rely on the accounting records to produce information useful for operating the business.

c. Cash is important because of its effect on a business. All transactions ultimately affect cash. Businesses purchase assets and must pay cash. They make sales and collect cash. All expenses ultimately require cash. Also, cash is susceptible to theft because it is the medium of exchange. Financial distress is usually accompanied by a shortage of cash. These factors combine to give cash more importance than its account balance would suggest.

d. Having a check signer cancel supporting documents reduces the opportunity for fraud. Without this control procedure, a dishonest employee could resubmit the documents for payment a second time. The employee could change the payee’s address and have the check sent to an address that the employee controls. Or the employee could arrange to have the second payee split the second payment with the employee. Canceling the documents immediately upon payment makes it difficult to get approval for duplicate payment.

(5 min.) E 7-6

a. 1 e. 3

b. 4 f. 2

c. 3 g. 1

d. 2

 

 

(10-20 min.) E 7-7

Bill Westphal

Bank Reconciliation

September 30, 20XX

BANK:

    

Balance, September 30

  

$ 441

Add: Deposit in transit

  

1,800

Less: Outstanding checks:

    

Check No.

    

626

$ (75)

  

627

(275)

(350)

Adjusted bank balance		  

$1,891
     

BOOKS:

    

Balance, September 30

  

$1,921

Less:

    

Correction of book error—

    

Recorded $68 check as $58

$ (10)

  

Cost of checks

(8)

  

Service charge

(12)

(30)

Adjusted book balance		  

$1,891

(10-15 min.) E 7-8

Mario Bocelli

Bank Reconciliation

October 31, 20XX

BANK:

    

Balance, October 31

  

$2,750

Add: Deposit in transit

  

1,788
   

4,538

Less: Outstanding checks:

  

(467)

Adjusted bank balance		  

$4,071
     

BOOKS:

    

Balance, October 31

  

$4,027

Add: EFT collection—rent

  

400
   

4,427

Less:

    

Service charge

$ (12)

  

NSF checks

(74)

  

Charge for printed checks

(9)

  

Correction of book error—

    

Recorded $290 check as $29

(261)

(356)

Adjusted book balance		  

$4,071

(10 min.) E 7-9

Journal

DATE

ACCOUNTS AND EXPLANATIONS

POST.

REF.

DEBIT

CREDIT

Oct.

31

Cash

  

400

  
   

Rent Revenue

    

400
   

EFT collection of rent.

      
           
 

31

Miscellaneous Expense ($12 + $9)

  

21

  
   

Cash

    

21
   

Bank service charge and charge for

      
   

printed checks.

      
           
 

31

Accounts Receivable

  

74

  
   

Cash

    

74
   

NSF checks returned by bank.

      
   

     
 

31

Salary Expense ($290 ! $29)

  

261

  
   

Cash

    

261
   

Correction of book error.

      

(5-15 min.) E 7-10

The most likely way a person would manipulate a bank reconciliation to cover a theft is by understating the dollar amount of the outstanding checks. These are the most numerous items on the bank reconciliation and thus the place where a manipulation would be hardest to detect.

Example: Reconciliation

Honest Manipulated

Bal. per bank $500 $500

Less: Outstanding checks (200) (100) Understated

Adjusted bal. per bank $300 Amounts $400 Amounts

disagree agree

Adjusted bal. per books $400 $400

This theft could have been avoided by having someone besides the restaurant manager perform the bank reconciliation.

 

Note: Student responses probably will not include this numerical example.

 

Faculty Webserver - Disclaimer
Views expressed on this website are the views of the faculty member.