Internal Control and Cash: Learning Objectives

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition
CHAPTER 7
INTERNAL CONTROL AND CASH
LEARNING OBJECTIVES
1. Explain the primary components of an internal control system, including its
control activities and limitations.
2. Apply the key control activities to cash receipts and payments.
3. Prepare a bank reconciliation.
4. Explain the reporting and management of cash.
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

AND BLOOM’S TAXONOMY
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT
Questions
1. 1 C 6. 1 C 11. 2 C 16. 2,3 C 21. 3 K
2. 1 C 7. 1 C 12. 2 C 17. 3 C 22. 4 C
3. 1 C 8. 1 C 13. 2 C 18. 3 C 23. 4 C
4. 1 K 9. 1 C 14. 2 C 19. 3 C 24. 4 C
5. 1 C 10. 2 C 15. 2,3 C 20. 3 C 25. 4 C
Brief Exercises
1. 1 C 4. 1,2 K 7. 3 AN 10. 3 AP 13. 4 AP
2. 1 K 5. 3 C 8. 3 AN 11. 3 AP
3. 1,2 K 6. 3 AN 9. 3 AP 12. 4 C
Exercises
1. 1 C 4. 1,2 C 7. 3 AP 10. 4 AN
2. 1 C 5. 3 AP 8. 3 AP 11. 4 E
3. 1,2 C 6. 3 AP 9. 3 AP
Problems: Set A and B
1. 1,2 C 4. 1,2 AN 7. 3 AP 10. 4 C
2. 1,2 AN 5. 3 AP 8. 3 AP 11. 4 C
3. 1,2 AN 6. 3 AP 9. 4 AN
Accounting Cycle Review
1. 3,4 AP
Cases
1. 1 C 3. 1 C 5. 4 E
2. 4 C 4. 1,2 S 6. 1,2 C
Solutions Manual -1 Chapter 7

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Legend: The following abbreviations will appear throughout the solutions manual
file.
LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to prepare in minutes
AACSB Association to Advance Collegiate Schools of Business

Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency
cpa-e001 Ethics Professional and Ethical Behaviour
cpa-e002 PS and DM Problem-Solving and Decision-Making
cpa-e003 Comm. Communication
cpa-e004 Self-Mgt. Self-Management
cpa-e005 Team & Lead Teamwork and Leadership
cpa-t001 Reporting Financial Reporting
cpa-t002 Stat. & Gov. Strategy and Governance
cpa-t003 Mgt. Accounting Management Accounting
cpa-t004 Audit Audit and Assurance
cpa-t005 Finance Finance
cpa-t006 Tax Taxation

ANSWERS TO QUESTIONS
1. The five primary components of a good internal control system include the
control environment, risk assessment, control activities, information and
communication, and monitoring.
A control environment encourages integrity and a high standard of ethical

behaviour. Risk assessment involves identification and management of key
business risks. Control activities are policies and procedures to help mitigate
the business risks. Information and communication ensures that the internal
control system captures and communicates the appropriate information to
internal and external users. Monitoring the internal control system for its
adequacy is a recurring process.
LO 1 BT: C Difficulty: S Time: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting
2. Management is responsible for establishing a company’s control

environment. Since management is responsible for the preparation and
delivery of accurate and fair financial statements, it follows that management
should also be responsible for the internal control system that generates the
financial information communicated to the users of that information.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
3. When designing and explaining to all employees the system of internal

control of the company, management must be clear as to their expectations
concerning what actions all employees must take and the consequences of
not following management’s policies and procedures. Those individuals in
top management must set the correct tone by strictly adhering to the
company policies and procedures and providing a consistent example and
message to all employees. This conformance will demonstrate commitment
on the part of management to the importance of the internal control system
and environment for all concerned and the pledge to administer
consequences to anyone not following their lead.

4. The five control activities that apply to most companies are assignment of
responsibility, segregation of duties, documentation, physical controls, and
review and reconciliation.
LO 1 BT: K Difficulty: S Time: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting
5. Documentation procedures contribute to good internal control by providing

evidence of the occurrence of transactions and events and, when signatures
(or initials) are added, the documents establish responsibility for the
transactions. The prompt transmittal of documents to the accounting
department contributes to recording transactions in the proper period, and
the pre-numbering of documents helps to ensure that a transaction is
recorded only once.
6. Independent review and reconciliation by internal auditors is necessary

because employees can forget to, or intentionally fail to, follow internal
controls, or they might become careless if there is no one to observe and
evaluate their performance. Segregating the physical custody of assets
from accounting record keeping is not enough to ensure that nothing has
been stolen or recorded incorrectly. A performance review still needs to be
done to ensure these controls were working effectively.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t004 CM: Reporting and Audit
7. External auditors are required to be independent of the organization they

audit. This independence provides the reassurance needed by external
users and owners of the organization about the financial condition and
performance of the business depicted in the financial statements.
Independence provides the proper environment to arrive at appropriate
accounting and disclosure conclusions, particularly when judgement is
involved. Internal auditors are not independent of the organization as they
are employees of the organization. Their role is to assist management in
their responsibility to provide a proper internal control system and
environment.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t004 CM: Reporting and Audit

8. A company’s system of internal control can only give reasonable

assurance that assets are properly safeguarded and that accounting
records are reliable because the cost of a perfect system outweighs its
benefits. For example, if a company wanted flawless accounting records,
they could double the number of accountants on staff and have the new
accountants check all of the work that was done by experienced
accountants but the benefit of this is outweighed by the costs. Absolute
assurance is too costly. Furthermore, even if cost was not a factor, human
error and collusion cannot be eliminated.
9. Collusion occurs when two or more employees agree to circumvent

procedures or controls or get around control activities in an organization in
order to gain an advantage or to cover up theft or fraud. The internal control
activity that is most affected by collusion is the segregation of employees’
duties.
10. Electronic funds transfers normally result in better internal control since no
cash or cheques are handled by employees, thereby limiting the possibility
of misappropriation. However, controls over EFT payments (and collections)
do need to be put in place.
11. This is a violation of the assignment of responsibility control activity. Each

cash register should only be used by one employee and an independent
verification of the cash in each register at the end of each shift should be
compared to the total of the sales recorded in the cash register plus the float
(coins and paper currency for making change) in the register. If a
discrepancy arises, the employee responsible for that register can be held
responsible.

12. Cash registers are visible to the customer. Thus, they prevent the sales clerk
from ringing up a lower amount for the price 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. Having scanners
reduces the chance of error in entering the price of an item.
13. This statement is true if the alternative to a cheque payment is a cash

payment. It is not always practical to make all payments by cheque, but
payment by cheque contributes to effective internal control over cash
disbursements as it provides a record of all payments. Also, having only
authorized individuals sign the cheques reduces the likelihood of payments
being made for unauthorized amounts or to unauthorized vendors.
14. The receptionist has an opportunity to commit fraud. In the case of an

appointment where the customer pays cash, the cash can be pocketed by
the receptionist. The receptionist can then cancel the appointment, leaving
no trace in the accounting records of the revenue generated by the service.
This is a clear case of lack of segregation of duties.
LO 2 BT: C Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
15. An employee who has no other responsibilities that relate to cash should
prepare the bank reconciliation. If a person had responsibility for handling
cash and also prepared the bank reconciliation, they could use the bank
reconciliation to hide fraud by falsifying the bank balance or misstating
reconciling items.
LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
16. A bank contributes significantly to internal control over cash because it:
(1) safeguards cash on deposit, (2) minimizes the amount of cash that must
be kept on hand, and (3) provides another record of all bank transactions.

17. The lack of agreement between the cash balances may be due to either:
(1) Timing differences—caused by recording a transaction on the
company’s books in one month and the bank recording it another
month (example – outstanding cheque) or the bank recording a
transaction first which the company will record after completing the
bank reconciliation (example – a bank service charge, or an NSF
cheque).
(2) Errors—made by either the company or the bank. For example, a
cheque for $110 is recorded by the depositor at $101.
18. (a) An NSF cheque is a cheque issued by a customer that was recorded
by the company when it was received and then deposited in the bank
only to discover later that the customer did not have the funds to cover
the cheque payment.
(b) An NSF cheque makes the bank balance lower than the book balance
and requires the book balance to be updated. Consequently, it is
deducted from the balance per books.
(c) An NSF cheque results in an entry in the company’s books, as a debit
to Accounts Receivable and a credit to Cash (assuming the cheque
deposited was a collection on account). The debit to Accounts
Receivable includes any additional charge that the bank may add for
their services with respect to the NSF cheque or the company may add
for late payment.
19. Since the March cheque has still not cleared the bank at April 30, it must
be included in the April 30th bank reconciliation as an outstanding cheque.

20. When performing a bank reconciliation, outstanding cheques are subtracted

from the bank balance to “move” that balance closer to the one recorded on
the company’s books. Since the bank balance is lower than the book
balance by the amount of this fraud, Sam will understate the amount of
outstanding cheques on the reconciliation. For example, if there was no
fraud, let’s assume that the bank balance would be $5,000 and that the
outstanding cheques were $3,000 so the book balance should be $2,000.
After the fraud, the book balance is still $2,000 but the bank balance is now
$3,300 instead of $5,000. When Sam prepares the reconciliation he has to
make sure that the $3,300 will reconcile to $2,000 so he will list the
outstanding cheques as only $1,300, thereby understating them by the
amount of cash he has stolen. The real outstanding cheques of $3,000 less
the stolen amount of $1,700, equals $1,300.
21. Cash includes cash on hand and cash in bank accounts. Cash equivalents
include short-term, highly liquid held-for-trading investments less any bank
overdrafts. Together, these two amounts combine and are reported as cash
and cash equivalents in the current assets section of the statement of
financial position.
22. Restricted cash is not available for general use, as it is restricted for a special
purpose. When the restricted purpose is of a long-term nature, the restricted
cash is reported as a non-current asset. If it is expected to be used within
one year of the statement of financial position date, it would be classified as
a current asset and disclosed in the financial statements. Compensating
balances are minimum cash balances which lenders specify that a borrower
must maintain in the borrower’s bank account to provide support for a loan.
A compensating balance should be reported as a non-current asset and the
details of the loan conditions should be disclosed in the notes to the financial
statements.

23. The line of credit facility of $16 million does not represent a liability until
Brandon Corporation borrows (or draws) money under the line of credit. In
the notes to the financial statements, the terms of the line of credit and its
available limit of $16 million should be reported to demonstrate how the
business is well positioned to deal with future cash flow demands or to take
advantage of investment opportunities.
24. The basic principles of cash management are: (1) increase the speed of
collection on receivables, (2) keep inventory levels low, (3) delay payment
of liabilities, (4) plan the timing of major expenditures, (5) invest idle cash,
and (6) prepare a cash budget. The first three principles are ways to
increase cash on hand. The last three principles focus on making sure
management understands when cash balances will be high so that
investment income can be earned from idle cash and when cash balances
will be low so that bank loans or other financing can be obtained.
25. Having too much cash on hand may hinder a business’ performance if the
cash cannot be used effectively and therefore not give a proper return to
the shareholders. Effective uses of cash can include upgrading existing
property, plant, and equipment, expanding the business, paying down
debt, repurchasing shares, or paying dividends.

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 7-1
Control Activity Example
Assignment of Responsibility One person operates the cash register at the exit
of the parking garage.
Segregation of duties Tickets are provided to those entering the

garage by an automated machine. This ticket is
given to the attendant on exiting the parking
garage. In this way, the attendant does not
authorize the parking and collect the cash.
Documentation The time on the ticket is entered into a machine

to determine the amount owed, which is keyed
into the cash register before the gate will open.
In this way the total time in the parking garage is
recorded.
Physical controls Cash is kept in a cash register.
Review and reconciliation If a customer is overcharged, they will complain.

Review to make sure parking gate is not being
raised prior to payment being received.
Reconcile the number of parking tickets issued
to the amount of cash received.

BRIEF EXERCISE 7-2
(a) 3 All transactions should include original, detailed receipts.

(b) 4 Undeposited cash should be stored in the company safe.
(c) 5 Surprise cash counts are performed by internal audit.
(d) 1 Responsibility for related activities should be assigned to specific
employees.
(e) 2 Cheque signers are not allowed to record cash transactions
BRIEF EXERCISE 7-3
1. Documentation and physical controls

2. Review and reconciliation
3. Segregation of duties
4. Assignment of responsibility
5. Physical controls
LO 1,2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 7-4
1. Documentation
2. Review and reconciliation
4. Assignment of responsibility
5. Segregation of duties
LO 1,2 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7-5
1. Bank – 7. Book +
2. NA 8. Bank –
3. Bank + 9. Book –
4. Book – 10. Book –
5. Bank + 11. Bank –
6. Book – 12. Book +
BRIEF EXERCISE 7-6
January deposits in transit:
Deposits in transit at beginning of month ........................................... $ 0

Add: Deposits recorded in company books this month ...................... 5,000
Less: Deposits recorded on this month’s bank statement ................. 4,000
Deposits in transit at end of month .................................................... $1,000
February deposits in transit:
Deposits in transit at beginning of month ........................................... $1,000

Add: Deposits recorded in company books this month ...................... 5,600
Less: Deposits recorded on this month’s bank statement ................. 4,600
Deposits in transit at end of month .................................................... $2,000
LO 3 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7-7
November outstanding cheques:
Outstanding cheques at beginning of month ..................................... $ 0

Add: Cheques recorded in company books this month ..................... 27,100
Less: Cheques recorded on this month’s bank statement ................. 25,900
Outstanding cheques at end of month ............................................... $ 1,200
December outstanding cheques:
Outstanding cheques at beginning of month ..................................... $1,200

Add: Cheques recorded in company books this month ..................... 23,200
Less: Cheques recorded on this month’s bank statement ................. 19,700
Outstanding cheques at end of month ............................................... $ 4,700
BRIEF EXERCISE 7-8
(a) Kashechewan should correct its books for the error in recording the cheque
by reducing cash by $90 ($659 – $569).
The cheque in the amount of $415 mistakenly deducted by the bank should
be added back to the bank balance since it is the bank’s error.
(b) Accounts Payable ..................................................................... 90

Cash ........................................................................... 90
No entry is necessary for the cheque mistakenly deducted by the bank,

although the bank should be notified of this error.

BRIEF EXERCISE 7-9
June 30, reconciled cash balance per bank reconciliation ......... $18,920
Add: Cash receipts in July ......................................................... 21,700
Less: Cash disbursements in July ............................................. 24,300
July 31, unreconciled cash balance ........................................... $16,320
LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 7-10
Cash balance per bank $19,260

Add: Deposits in transit 1,450
20,710
Less: Outstanding cheques 3,630
Reconciled cash balance per bank $17,080
Cash balance per books (as per BE7-9) $16,320

Add: EFT collections on account 2,170
18,490
Less: Bank service charge $ 90
NSF cheque and fee ($1,270 + $50) 1,320
1,410
Reconciled cash balance per books $17,080

BRIEF EXERCISE 7-11
July 31 Cash ......................................................................... 2,170

Accounts Receivable ......................................... 2,170
Bank Charges Expense ............................................ 90

Cash .................................................................. 90
Accounts Receivable ................................................ 1,320

Cash .................................................................. 1,320
BRIEF EXERCISE 7-12
Ouellette Ltée should report the cash in the bank, the payroll bank account, and
the cash register floats as cash. The held-for-trading investments would be
reported as cash equivalents because they mature within 90 days. Cash and cash
equivalents are recorded as a current asset. Assuming the restricted cash is not
expected to be used during the next year, the restricted cash for the plant
expansion should be reported as a non-current asset. The compensating balance
should also be reported as a non-current asset and disclosed in the notes.
LO 4 BT: C Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7-13
(a)
Cash in savings account $22,000
Less compensating balance 5,000 $17,000
Cash on hand 1,700
Cash in chequing account 14,000
Cash reported as a current asset $32,700
(b)
Compensating balance reported as non-current asset
and disclosed in the notes. 5,000
Income tax refund, current assets: Income Tax Receivable 2,000
Postdated cheques received from customers of $1,000 are not yet valid and
represent underlying current assets of accounts receivable.

SOLUTIONS TO EXERCISES
EXERCISE 7-1
(a) (b)
Control Strength or Weakness Suggested Improvements
1. No establishment of responsibility over the cash The employees should use separate cash
– weakness drawers.
Cash counts not performed independently – Cash counts should be performed by a

weakness supervisor at the end of the shift and the
totals compared to the cash register
reading.
2. By shredding the receipts there is no record Retain supporting information until all
maintained of sales for independent internal or independent verification is complete
external verification – weakness (a comparison of the receipts to the sales
recorded in the accounting records). Shred
the receipts only after the verification is
complete.
3. Cash receipts procedures appear to illustrate NA

good internal control – the segregation of duties
between receiving, recording, and depositing
cash greatly reduces the likelihood of cash
being stolen or recorded incorrectly – strength
4. Improper segregation of duties could result in Different individuals should receive cash,
the misappropriation of cash and the ability to record cash receipts, and deposit the cash.
misstate the accounting records to cover up the
misappropriation – weakness In a small business this may be impossible;
therefore, it is imperative that management
take an active role in the operations and
supervision of the business to enable
detection of any accounting irregularities.
5. The procedures in place to conduct the physical NA
inventory count appear to be reasonable –
strength

EXERCISE 7-2
1. (a) It is possible to detect this type of fraud by comparing the amount of
inventory consumed during the evening with the sales that were
recorded in cash registers.
(b) This fraud can be prevented by segregating the duties of those
individuals handling the drinks to those individuals having access to
the cash register. If additional staff is not available, the floor
supervisor should keep a close eye on the bartender or inventory
could be counted once a day.
2. (a) It is possible to detect this type of fraud as the bottles of liquor sold to
establishments are not the same as those sold at a liquor store. A
special label is attached, which can be detected at the end of the shift.
As well, if the additional empty bottles are on hand at the end of the
shift, when the inventory consumed (including the bartender’s bottle)
at the end of the bartender’s shift is compared to sales, a discrepancy
will be noticed.
individuals handling the drinks to those individuals having access to
the cash register. If additional staff is not available, the floor
supervisor should keep a close eye on the bartender and do a bottle
count at the end of the shift.
3. (a) It is possible to detect this type of fraud if someone notices that the
number of appointments and services given by the spa does not
reconcile to the revenue deposited in the bank account for the day.
Most businesses of this nature will have someone comparing the bank
deposit slips with the appointment schedule (often the schedule will
be printed off a day or two prior to the scheduled date).
individuals handling the appointments, to those handing the cash, and
again to those individuals making the bank deposit. If additional staff
is not available, the owner of the spa should at least make the bank
deposit and require that the scheduling software not allow
appointment changes on the day of the appointment.

EXERCISE 7-2 (CONTINUED)

4. (a) It is possible to detect this type of fraud but likely only after the first
instance of fraud. The individual in charge of approving the bank
reconciliation could insist on looking at the cheques returned by the
bank and detect the unauthorized cheque.
individuals handling the cheques with the individual preparing the
bank reconciliation, and by being vigilant in scrutinizing the bank
reconciliation and its supporting documents.

EXERCISE 7-3
(a) (b)
Recommended
Weakness Control Activity Improvement
1. Inability to fix responsibility Assignment of There should be separate

for cash to a specific clerk. responsibility cash drawers and register
pass codes for each clerk.
2. Cash is not adequately Physical controls Cash should be stored in a

protected from theft. locked safe until it is
deposited in the bank.
3. Cash is not independently Review and A cashier office supervisor

counted. reconciliation should count cash and
reconcile the amount of cash
received to the cash register
reading.
4. The accountant should not Segregation of duties An employee not otherwise

handle cash and record cash handling cash or the
transactions. accounting records should
make the deposits.
5. Some sales will not be Documentation and All sales should be entered in
recorded so that they can be physical controls the cash register to provide
independently verified later; evidence the transaction has
cash is not adequately occurred. In addition, the
protected from theft. loose change box should be
locked to keep it safe until the
funds are deposited.
LO 1,2 BT: C Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 7-4
(a) (b)
Recommended
Weakness Control Activity Improvement
1. Cheques are not Physical controls Cheques should be stored in a safe or

stored in a secure locked file drawer.
area.
2. The approval of and Assignment of The purchasing manager should not

payment to suppliers responsibility and approve bills for payment nor should this
is done by the wrong segregation of manager have signing authority. An
employee. duties employee, other than one involved with
purchasing, who is aware of delivery of
goods and services, should be
authorizing the payment and another
member of senior management should be
assigned cheque signing duties.
3. Blank cheques are Assignment of Establish a second signing authority with

signed. responsibility the bank.
4. Cheques are not Documentation Cheques should be prenumbered and

prenumbered. their serial continuity subsequently tested
for completeness.
5. The bank Review and A person independent of the accountant

reconciliation is not reconciliation should prepare the bank reconciliation. If
independently this is not possible, then the accountant
prepared. can prepare the reconciliation but the
owner, not the store manager (because
they can access cash) should approve it.
LO 1,2 BT: C Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 7-5
(a)
August 31 reconciled cash balance per bank reconciliation ............. $ 34,780
Add: (4) Cash deposits in September ............................................. 199,680
Less: (1) Cheques issued ................................................ $176,978
(2) Salaries deposited to employee accounts ......... 39,170
(3) Monthly EFT payment for rent ........................... 2,600 218,748
September, unreconciled cash balance ............................................ $ 15,712
(b) None of the above items would be included in the bank reconciliation as
they are included in the starting (unreconciled) cash balance and already
have been recorded by the company.

EXERCISE 7-6
Bank Books Journal

Not
Item Add Deduct Add Deduct Entry
Appli-
(Credit) (Debit) (Debit) (Credit) Required
cable
1. Deposits in transit at  No
the end of April
2. Deposits in transit at 
the beginning of April No
that cleared the bank
in April
3. Outstanding cheques 
at the beginning of No
April that cleared the
bank in April
4. Outstanding cheques  No
at the end of April
5. Bank service charges  Yes
6. Deposit of $400 made
in error by the bank to  No
the company’s
account
7. Cheque written for
$250 recorded in error  Yes
as $520 on the books
8. NSF cheque received  Yes
from customer
9. EFT collection on  Yes
account not previously
recorded by company
10. Interest earned on  Yes
bank account
LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 7-7
(a) Deposits in transit: July 31

Deposits in transit, June 30 .................................................. $ 2,000
Add: Deposits recorded in company books in July .............. 14,750
Less: Deposits recorded on bank statement in July............. 15,820
Deposits in transit, July 31 .................................................... $ 930
Deposits in transit: August 31

Deposits in transit, July 31 .................................................... $ 930
Add: Deposits per books in company books in August ........ 22,900
Less: Deposits recorded on bank statement in August ........ 22,500
Deposits in transit, August 31 ............................................... $ 1,330
(b) Outstanding cheques: July 31

Outstanding cheques, June 30 ............................................. $ 570
Add: Cheques recorded in company books in July ............... 18,200
Less: Cheques recorded on July bank statement ................. 17,200
Outstanding cheques, July 31............................................... $ 1,570
Outstanding cheques: August 31

Outstanding cheques, July 31............................................... $ 1,570
Add: Cheques recorded in company books in August .......... 22,700
Less: Cheques recorded on August bank statement ............ 23,520
Outstanding cheques, August 31 .......................................... $ 750

EXERCISE 7-8
(a)
NEOPOLITAN LTD.
Bank Reconciliation
July 31
Cash balance per bank statement $10,670

12,638
Cash balance per books $ 8,953

Add: Cheque No. 373 error ($980 – $890) 90
EFT deposits 1,276
10,319
Less: Bank service charges 40
(b) July 31 Cash ................................................................. 90

Office Supplies ............................................ 90
Cash ................................................................. 1,276

Accounts Receivable ................................... 1,276
31 Bank Charges Expense .................................... 40

Cash ............................................................ 40

EXERCISE 7-9
(a) Outstanding deposit of May 31 $ 7,820

(b) Outstanding Cheques:
Cheque No. 003 – March 14 $1,675
Cheque No. 005 – March 18 360
Cheque No. 007 – March 22 2,130
Cheque No. 008 – March 23 525 $ 4,690
(c) Returned cheque – NSF S. Gillis – deduct 1,350
NSF fee – deduct 25
Bank service charges – deduct 40 $ 1,415
(d) May1, beginning balance ........................................................ $ 0
Add: Cash receipts in May ...................................................... 37,470
Less: Cash disbursements in May .......................................... 26,819
May 31, unreconciled cash balance........................................ $10,651
(e)
SHARP MANUFACTURING LTD.
Bank Reconciliation
May 31
Cash balance per bank statement $6,106

13,926
Cash balance per books $ 10,651

Less: Returned cheque – NSF S. Gillis 1,350
NSF fee 25
Bank service charges 40 1,415

EXERCISE 7-10
(a) Items that are considered cash but not cash equivalents would include:
1. Currency and coin $ 123
2. Royal Bank chequing account 4,325
3. Royal Bank savings account 5,000
5. Undeposited April customer cheques 750
7. Over-the-counter receipts ($1,735 + $1,230) 2,965
9. Cash register floats 500
Total cash $13,663
(b) 4. The $25,000 government treasury bill is considered a cash equivalent
because it matures within 90 days and the value at which it will mature
at is certain.
(c) Cash and cash equivalents = $13,663 [from (a)] + $25,000 = $38,663
(d) 6. Post-dated cheque—Accounts Receivable; Statement of Financial Position
8. IOU from company receptionist—Advances to Employees; Statement
of Financial Position

EXERCISE 7-11
Suggestions to improve cash management practices for Tory, Hachey, and
Wedunn:
1. Prepare a cash budget.
2. Adopt a time docketing accounting system that will track work performed on
files for individual clients.
3. Invoice clients monthly as work progresses, using the accounting records
established for docketing time.
4. To the extent practicable, ask clients for retainers before work on files
begins. Use the retainers received to apply payments for monthly invoices
sent to clients.
5. When retainers are used up, request additional retainers until the case is
completed.
6. Establish an operating line of credit with the bank for day-to-day operations.
7. Arrange a non-current loan for renovations and equipment with repayment
terms structured to coincide with expected future cash inflows.
8. Negotiate terms with suppliers that allow for delayed payments.
9. To the extent necessary, obtain additional investments from the three
lawyers to ensure payment to suppliers and employees are made on time.
LO 4 BT: E Difficulty: C Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

SOLUTIONS TO PROBLEMS
PROBLEM 7-1A
(a) Control Activities Application to Cash Receipts

Assignment of responsibility Only cashiers are authorized to sell tickets.
Only the manager and cashier can handle cash.
Only ushers authorize entrance.
Segregation of duties The duties of receiving cash and admitting

customers are assigned to the cashier and to the
doorperson. The manager maintains custody of
the cash, and the company accountant records
the cash.
Documentation Tickets are prenumbered. Cash count sheets are

prepared and initialled. Deposit slips are prepared.
Physical controls Cash is deposited in a bank vault nightly.

Prenumbered tickets are locked into the machine
by the manager and the machine is used to issue
tickets.
Review and reconciliation Cash counts are made by the manager at the end
of each cashier’s shift. Daily comparisons are
made by the head cashier and accounting
department of cash received, deposited, and
recorded.
(b) Actions by the usher and cashier to collaborate to misappropriate cash

include:
1. Instead of tearing the tickets, the usher could return the tickets to the
cashier who could resell them, and the two could divide the cash.
2. The cashier could issue a lower priced ticket than paid for and the usher
would admit the customer. The difference between the ticket issued and
the cash received could be divided between the usher and cashier.

PROBLEM 7-2A
(a) Control Weaknesses (b) Improvements
Fred or Asmaa can order goods John or Rehana should take on

(assignment of responsibility) and the responsibility for the
approve invoices for payment (up to purchase of goods.
$20,000 for Fred and up to $5,000 for
Asmaa). Fred is the sole signer of
cheques less than $20,000. Fred could
purchase items for personal use or create
and pay invoices to companies that he
owns.
Fred signs cheques and prepares the Someone who does not record
bank reconciliation. Fred could write a cash transactions or has access
cheque to himself and cover it up in the to cash and cheques should
bank reconciliation and/or through journal prepare the bank reconciliation.
entries. If this is not possible, then one of
the owners should either
prepare or at least review and
approve the reconciliation.
One person can sign cheques At least two individuals should

sign each cheque to prevent
inappropriate expenditures.
LO 1,2 BT: AN Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 7-3A
(a) Control Weaknesses (b) Recommendations
1. No segregation of duties between receiving the cash The duties of receiving cash and
and admitting students to the lessons. The instructor admitting students should be
could admit students for free or charge extra and assigned to separate individuals.
pocket the difference or report fewer students and
pocket the extra money.
2. There is no segregation of duties in the accounting An independent person should

function. The general manager could prepare approve the invoices for payment
fictitious invoices for payment or write cheques to and prepare the bank
himself and not be detected because the general reconciliations.
manager also prepares the bank reconciliation.
3. Each salesperson is responsible for determining An independent and experienced

credit policies and they receive a commission based person should be responsible for
on sales. They could provide credit to customers setting credit limits for customers.
who should not receive credit in order to earn the Credit limit criteria should be
commission on the sale. determined by the company and
consistently applied.
4. All programmers have access to the accounting Access to the accounting records
software which could provide unauthorized changes should be restricted and protected
to the accounting records (such as wage rates). with password or biometric
restrictions.
5. Eliminating receiving reports and purchase orders Receiving reports and purchase
causes problems when invoices from suppliers are orders should be reinstated.
received. Accountants will not be able to verify if the
invoice pertains to items that have actually been
received or approved. Incorrect or fictitious invoices
may be paid or unauthorized orders made.
LO 1,2 BT: AN Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 7-4A
The tickets were unnumbered so there is Tickets should be prenumbered so

no way of knowing if duplicates were that the students could be held more
made and sold. accountable for the tickets and a
final reconciliation could be
performed between cash receipts
and sales.
No record was kept of which students Roger should have kept a record of
took tickets to sell or how many they took which tickets were issued to each
so there is no way of knowing if tickets student for resale. (Note: This
were given away for free and how many problem could have been largely
tickets were actually sold. avoided if the tickets had been sold
at the door on the day of the dance.)
There was no control over unsold tickets. Students should have been required
This deficiency made it possible for to return the unsold tickets to Roger
students to sell tickets, keep the cash, as well as the cash. In each case,
and tell Roger that they had disposed of the students should have been
the unsold tickets. issued a receipt for the cash they
turned in and the tickets they
returned.
Did not receive a receipt from Obnoxious A receipt should have been obtained
Al. Without a receipt, there is no way to from Obnoxious Al.
verify how much Obnoxious Al was
actually paid. For example, it is possible
that he was only paid $100 and that
Roger took the rest.

PROBLEM 7-4A (CONTINUED)
(a) and (b) (continued)
Inadequate control over the cash box. Only Roger should have had
access to the key and disbursed
funds when necessary for
purchases.
Praveen Patel counted the funds, made Roger should have counted the
out the deposit slip, and took the funds to funds, with someone observing
the bank. Praveen could have taken him. Then he could have made out
some of the money. the deposit slip and had Praveen
deposit the funds.
Students taking money for decorations Roger should reimburse each

were not required to have a receipt and student when a receipt is provided.
had unrestricted access to the cash box to
pay for their purchases.
Sara Wu was collecting tickets and There should have been one
receiving cash for additional tickets sold. person selling tickets at the door
and a second person collecting
tickets. The tickets collected times
the price per ticket could then be
compared to the cash collected.
Net cash receipts were less than A final reconciliation should have
anticipated. been performed between cash on
hand, ticket sales, and purchase
receipts.

PROBLEM 7-5A
(a) BEAUPRÉ LTD.

Bank Reconciliation
July 31
Cash balance per bank statement .............................................. $21,722
Less: Outstanding cheques ($2,738 – $2,162) ............................ $ 576

Deposit incorrectly posted by bank ................................. 3,100 3,676
Reconciled cash balance per bank ............................................. $18,046
Cash balance per books ............................................................. $12,934

Add: EFT collections ................................................................ 5,230
18,164
Less: Bank service charges ....................................................... 118
Reconciled cash balance per books ........................................... $18,046
The salaries are not a reconciling item because they were recorded by both
the bank and the company.
(b) July 31 Cash ....................................................................... 5,230

Accounts Receivable ..................................... 5,230
31 Bank Charges Expense .......................................... 118

Cash .............................................................. 118

PROBLEM 7-6A
(a) HIRJI HOLDINGS LTD.

Bank Reconciliation
October 31
Cash balance per bank statement ........................ $16,780

Add: Outstanding deposits ................................... 6,300
................................... 23,080
Less: Outstanding cheques .................................. 2,650
Reconciled cash balance per bank ....................... $20,430
Cash balance per books ....................................... $19,070

Add: Note receivable collection ........................... $ 2,000
Interest receivable collection on note..................... 180 2,180
................................................................. 21,250
Less: NSF cheque ............................................... $ 575
Cheque #3421 error ($860 - $680) .............. 180
Bank service charges .................................. 65 820
Reconciled cash balance per books ...................... $20,430
(b) Oct. 31 Cash ................................................... 2,180

Notes Receivable ..................... 2,000
Interest Receivable ................... 180
31 Accounts Receivable .......................... 575

Cash .......................................... 575
31 Utilities Expense ................................. 180

Cash .......................................... 180
31 Bank Charges Expense ...................... 65

Cash .......................................... 65

PROBLEM 7-7A
(a) February 28, reconciled cash balance per bank reconciliation $17,029
Add: Cash receipts in March.................................................... 9,249
Less: Cash disbursements in March ........................................ 7,912
March 31, unreconciled cash balance ..................................... $18,366
(b) Deposits in transit: $4,012 (dated March 31).
(c) Outstanding cheques: #3473 for $4,947 (dated March 29).
(d)
YAP LTD.
Bank Reconciliation
March 31
Balance per bank statement .......................................... $17,163

Add: Deposits in transit [from (b)] .............................. $4,012
Error in recording cheque #3472
($1,823 – $1,283) ......................................... 540 4,552
21,715
Less: Outstanding cheques
No. 3473 [from (c)] ........................................... 4,947
Reconciled cash balance per bank ............................... $16,768
Balance per books [from (a)] ........................................ $18,366

Add: EFT collection—Boudreault ............................. 610
18,976
Less: Service charges ................................................ $ 89
NSF cheque and fee—Mustafa ($870 + $35) ... 905
EFT loan payment ............................................ 1,214 2,208
Reconciled cash balance per books .............................. $16,768

(e) Mar. 31 Cash ....................................................... 610

Accounts Receivable ...................... 610
31 Bank Charges Expense .......................... 89

Cash ............................................... 89
31 Accounts Receivable .............................. 905

Cash ............................................... 905
31 Bank Loan Payable ................................ 1,130

Interest Expense..................................... 84
Cash ............................................... 1,214

PROBLEM 7-8A
(a)
October 31, reconciled cash balance per bank reconciliation ....... $23,812
Add: Cash receipts in November .................................................. 21,438
Less: Cash disbursements in November ...................................... 30,968
November 30, unreconciled cash balance .................................... $14,282
(b) HAMPTONS LIMITED

Bank Reconciliation
November 30
Balance per bank statement ......................................... $18,958

Add: Deposits in transit (Nov. 30 cash receipt) ........... 2,676
21,634
No. 2474 ........................................................ $1,008
No. 2480 ........................................................ 1,224
No. 2482 ........................................................ 1,660 3,892
Reconciled cash balance per bank ............................... $17,742
Balance per books [from (a)] ........................................ $14,282

Add: EFT collection .................................................. 5,008
19,290
Less: NSF cheque and fee ($500 + $80) ................... $580
Bank service charges ....................................... 50
Error in recording cheque No. 2476
($4,760 – $5,660) ............................................ 900
Error in Nov. 20 deposit ($5,908 – $5,890) ...... 18 1,548
Reconciled cash balance per books ............................. $17,742

(c) Nov. 30 Cash ..................................................................... 5,008

Notes Receivable ........................................ 4,400
Interest Revenue .......................................... 608
30 Bank Charges Expense ........................................ 50

Cash ............................................................. 50
30 Accounts Receivable (Giasson Developments) .... 580

Cash ........................................ 580
30 Accounts Payable ................................................. 900

Cash ........................................ 900
30 Accounts Receivable............................................. 18
Cash ........................................ 18

PROBLEM 7-9A
(a) and (b) Cash and cash equivalents (reported in Current Assets section)
Cash:
1. Cash on hand ............................................................... $ 2,920
2. Commercial bank savings account ............................... 57,800
Commercial bank chequing account ............................ 25,000
U.S. bank account (Canadian equivalent) .................... 27,000
Total cash ............................................................................... 112,720
Cash equivalents:
5. Government of Canada Bond....................................... 50,000
Total cash and cash equivalents ............................................. $162,720
(c) 3. Restricted cash would be reported as a current or non-current asset,

depending on the timing of the equipment replacement.
4. Amounts due from employees (travel advances) of $8,700 would be

classified as other receivables in an account called Advances to
Employees.
5. Held-for-trading investments would be listed separately in the

current assets section of the statement of financial position and
would include the term deposit that matures in 120 days (to be a
cash equivalent it would have to mature in 90 days or less) and the
shares of Loblaw Companies Limited. The classification of the
shares could also be non-current depending on management’s
intentions for holding the shares.
6. NSF cheques would be included in Accounts Receivable, assuming

the company expects collection. If collection is doubtful, they might
have been provided for as part of Bad Debts Expense and related
Allowance for Doubtful Accounts or written off as uncollectible.
7. This amount would be reported as restricted cash in the non-current

assets section of the statement of financial position.

PROBLEM 7-10A
(a) Cash includes cash on hand, and money in bank accounts.
Cash equivalents are short-term, highly liquid (easily sold) trading

investments that are subject to insignificant risk of changes in value less
any bank overdrafts. Examples of trading investments that would be
classified as cash equivalents include debt investments such as
government treasury bills (T-bills) that mature in 90 days or less, money
market funds, and 90-day bank term deposits.
These two categories are often combined as they are the cash either
currently available or the cash that is readily available for use by the
company.
(b) Restricted cash will most likely be reported in the non-current assets
section of the statement of financial position as it can likely not be used to
meet current liabilities.
(c) It is necessary to report restricted cash separately because the cash

cannot be used for regular operations and has been set aside for a specific
purpose. As such, it is not available for use. Separate classification assists
users of the statement of financial position in assessing the flexibility
available to the business in managing its cash and obligations to pay cash.
LO 4 BT: AN Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 7-11A
Accelerating collection of receivables

- currently only a minimal deposit of $50 is received from the customers.
Increase the deposit to cover cost of decorations so that this money is
received up front
- have final payment due immediately following the function
- both of these will improve cash flow as cash receipts will be accelerated
- Bev will have to check with other decorating companies to see what their
terms are in order to remain competitive
- if final payment cannot be received immediately due to competitive
pressures, Bev must monitor collections better and actively contact
customers whose payments are overdue so that cash can be collected
more promptly
Delay payment of liabilities

- Bev can apply for credit which will delay payment by 30 days, giving her
use of this cash for 30 more days

PROBLEM 7-1B
Control Activities Application to Cash Payments
Assignment of responsibility Only the controller and assistant controller are

authorized to sign cheques. Invoices are approved by
the purchasing agent and goods received are
approved by the receiving department supervisor.
Segregation of duties The purchasing agent has only an approval function

and does not work in the receiving or accounting
areas. The receiving department supervisor has
access to the assets but does not order or record
purchases. Payment can only be made by the
controller or assistant controller, and the cheque
signers do not record the cash disbursement
transactions. The bank reconciliation is not done by
someone who records payments.
Documentation Cheques are prenumbered.

Following payment, the invoices are stamped “PAID”.
Physical controls Blank cheques are kept in a safe in the controller’s

office. Only the controller and assistant controller have
access to the safe. A computer is used for printing
cheques.
Review and reconciliation The cheque signer compares the cheque with the
approved invoice prior to issue. A staff accountant
reconciles the bank and book balances monthly.

PROBLEM 7-2B
(a) The weaknesses in control activities in the handling of collections include:
• Each usher could take cash from the collection plates en route to the
basement office.
• The head usher counts the cash alone so no one would ever know if
the head usher stole cash.
• The head usher’s notation of the count is left in the safe with the cash
so no one other than the financial secretary will know if the cash placed
in the safe was ever deposited.
• The financial secretary recounts the cash alone.
• The financial secretary withholds $200 per week – this is an unapproved
payment.
• The cash is vulnerable to robbery when kept in the unlocked safe
overnight.
• Cheques are made payable to “Cash” so anyone can cash them.
• The financial secretary has custody of the cash, maintains church
records, and prepares the bank reconciliation.
• No annual audits of cash receipts procedures are performed.
(b) The improvements should include the following:
(1) Head usher

• The head usher and a finance committee member should take the cash
to the office. The cash should be counted by the head usher and the
financial secretary in the presence of the finance committee member.
The amount counted should be written down on a cash count sheet and
copies kept by the secretary and finance committee member.
(2) Ushers
• The ushers should transfer their cash collections to a cash pouch (or
bag) held by the head usher. The transfer should be witnessed by a
member of the finance committee.

PROBLEM 7-2B (CONTINUED)
(b) (continued)
(3) Financial Secretary

• Following the count, the financial secretary should prepare a deposit
slip in duplicate for the total cash received, and the secretary should
immediately deposit the cash in the bank’s night deposit vault. A copy
of the deposit slip should be given to a finance committee member.
• A “petty” or small cash fund should be established for the financial
secretary to be used for weekly cash expenditures and requests for
replenishment of the fund should be sent to the chairperson of the
finance committee for approval. Receipts for items paid from this fund
along with the unused cash should be kept in a locked cash box.
Periodic counts of the cash box should be performed by a finance
committee member to ensure that the cash on hand plus receipts for
cash expenditures total the limit (for example, $200) established for the
fund.
(4) Finance Committee

• A reconciliation of the cash count sheet and the bank deposit slip should
be done every time a deposit is made to ensure all cash counted was
actually deposited.
• Members should make their cheques payable to the church, and not to
cash.
• At the end of each month, a member of the finance committee should
prepare the bank reconciliation.
• Annual audits should be performed.

PROBLEM 7-3B
(a) Control Weaknesses (b) Recommendations

1. Cash is collected and kept in the car. Cash should be deposited in the bank
This could result in theft. each day.
2. The person purchasing the merchandise is An independent person should verify the
the same person that verifies receipt of the receipt of goods. The purchaser should
goods and approves invoices for payment. approve bills for payment by the
Because this person is responsible for all controller.
activities related to purchasing, errors and
theft could occur.
3. All three cashiers use the same cash drawer. Each employee should use a separate
This could result in difficulty establishing cash drawer.
responsibility for errors.
4. The office manager opens the mail, deposits Mail should be opened by someone not
the cash and cheques, and posts the entry responsible for making the bank deposit.
in the accounting records. This could result The bank deposit slip should be
in the office manager depositing cheques reconciled to the accounting records (and
into his/her own account, taking the cash, perhaps a list of cheques kept by the mail
and not posting the entry for accounting room) on a daily basis to ensure all cash
purposes or posting a debit to an expense received was deposited and recorded.
rather than cash. Cash payments from customers should
also not be accepted through the mail.
5. The sales staff provide the product to the All sales staff should be provided with a
customer for small orders, receive the cash set amount of product. Replacement
or cheques from the customers, and restock product for product sold should only be
their own inventory. This could result in the provided to the sales staff by warehouse
sales staff keeping the payment from the personnel after the sales staff submit the
customer and/or taking the product money collected (cash or cheque) for the
themselves. product being replaced.
LO 1,2 BT: AN Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 7-4B
Bank statements are not being reviewed Bank statements should be reviewed on a
as is evidenced by the fact that the bank regular basis and all deposits on the
statements have not been opened. statement compared to accounting records.
As well, cheques should be scrutinized to
ensure they have been recorded and
written to valid vendors and that
appropriate endorsements (signatures)
have been provided.
Accounting records have not been An accounting system should be

created nor updated regularly. The lack of implemented immediately and all
accounting records means that the charity transactions recorded on a timely basis by
cannot meet its mandate of having an individual who does not have
financial records available for the public to responsibility over the collection or deposit
examine. Reconciliations cannot be of cash receipts and the authorization or
performed if there are no accounting signing of cheques for cash disbursements.
records to compare to the bank
statement. Finally, it is impossible for the
charity to know if its resources are being
spent on charitable activities if there is no
record of total cash receipts maintained.
Receipts are only issued for amounts over Prenumbered receipts should be issued for
$20. all donations and reconciled by a
representative of the charity at the end of
the day to the actual cash collected.

(a) and (b) (continued)

Collections are made by volunteers This is a problem facing many charities and one
who work on a short-term basis. that cannot easily be solved. Some charities will
screen their volunteers for any criminal
background. However, the use of prenumbered
receipt books is often the only available control.
Drivers collect cash. There is a The volunteer and the driver should count all
possibility that the driver could cash receipts at the end of the day. A
misappropriate cash and not report reconciliation of the cash per the receipt books
the collection. and the deposit should be prepared. An
independent person (not the driver) should
make the deposit daily. The reconciliation
should be sent back to the charity’s head office
to be used as a source document to update the
accounting records.
The driver uses money from cash All cash receipts should be deposited intact.
collections to pay expenses. This Cash disbursements should be by cheque only
means that cash receipts, cash after appropriate approval has been obtained.
deposits, and cash disbursements A special cash fund, also known as a petty cash
may not be recorded correctly. fund, could be established to allow for smaller
cash disbursements.
Because no reconciliation was The dance tickets should have been

made of the cash receipts to the prenumbered and the numbers of tickets taken
tickets printed for the dance, there is by each volunteer recorded. Cash receipts from
a possibility that the tickets could the ticket sales should have been reconciled to
have been sold by the volunteers the tickets. Any unsold tickets should have
and the cash never remitted to the been returned to the charity and accounted for
charity. in the reconciliation.

PROBLEM 7-5B
(a)
O’HEARNE LIMITED
Bank Reconciliation
May 31
Cash balance per bank statement .................................. $15,230

Add: Deposit in transit ................................................. $1,926
Bank error—O’Bearne cheque............................ 1,200 3,126
18,356
Less: Outstanding cheques ($2,900 – $2,240 + $1,892) 2,552
Reconciled cash balance per bank ................................ $15,804
Cash balance per books ................................................ $13,126

Add: EFT collections .................................................. 4,188
17,314
Less: NSF cheque and service charge ($1,350 + $80) $1,430
Bank service charge ...................................................... 80 1,510
Reconciled cash balance per books .............................. $15,804
(b) May 31 Cash ....................................................... 4,188

Accounts Receivable ...................... 4,188
31 Accounts Receivable .............................. 1,430

Cash ............................................... 1,430
31 Bank Charges Expense .......................... 80

Cash ............................................... 80

PROBLEM 7-6B
(a)
ISLAND MILLING LTD.
Bank Reconciliation
October 31
Cash balance per bank statement ......................... $17,230

Add: Deposit in transit ....................................... 3,600
20,830
Less: Outstanding cheques ................................ 6,200
Reconciled cash balance per bank ....................... $14,630
Cash balance per books ....................................... $14,565

Add: Cheque #1926 error ($3,760 - $3,670)...... $ 90
EFT collections.......................................... 2,650 2,740
17,305
Less: NSF cheque ........................................... $2,610
Bank service charge .................................. 65 2,675
Reconciled cash balance per books .................... $14,630
(b) Oct. 31 Cash ............................................... 90

Professional Fees Expense .... 90
31 Cash ............................................... 2,650

Accounts Receivable .............. 2,650
31 Accounts Receivable ...................... 2,610

Cash ....................................... 2,610
31 Bank Charges Expense .................. 65

Cash ....................................... 65

PROBLEM 7-7B
(a) April 30, reconciled cash balance per bank reconciliation ......... $14,000
Add: Cash receipts in May ......................................................... 5,457
Less: Cash disbursements in May ............................................. 6,201
May 31, unreconciled cash balance .......................................... $13,256
(b) Deposits in transit: $1,524 (dated May 31).
(c) Outstanding cheques #545 for $1,535 (dated May 31)
(d)
RIVER ADVENTURES LTD.
Bank Reconciliation
May 31
Balance per bank statement ............................................. $12,480

Add: Bank error cheque #543 ($2,210 – $2,120) .......... $ 90
Deposits in transit [from (b)] ................................. 1,524 1,614
14,094
No. 545 [from (c)]................................................. 1,535
Reconciled cash balance per bank ................................... $12,559
Balance per books [from (a)] ............................................ $13,256

Add: EFT collection A. Osborne ................................... 1,475
14,731
Less: Service charges ................................................... $ 95
EFT insurance payment ...................................... 927
NSF cheque and fee ($1,105 + $45) ................... 1,150 2,172
Reconciled cash balance per books.................................. $12,559

(e) Cash ...................................................................... 1,475

Accounts Receivable ................................... 1,475
Accounts Receivable ............................................. 1,150

Cash .............................................................. 1,150
Bank Charges Expense ......................................... 95

Cash .............................................................. 95
Prepaid Insurance.................................................. 927

Cash .............................................................. 927

PROBLEM 7-8B
(a) November 30, reconciled cash balance per bank reconciliation ....... $12,743
Add: Cash receipts in December ...................................................... 8,955
Less: Cash disbursements in December .......................................... 15,148
December 31, unreconciled cash balance ........................................ $ 6,550
(b) RACINE LIMITED

Bank Reconciliation
December 31
Cash balance per bank statement ............................. $10,395

Add: Deposits in transit ............................................ 1,197
11,592
No. 3474 ..................................................... $1,050
No. 3478 ..................................................... 538
No. 3483 ..................................................... 1,390 2,978
Reconciled cash balance per bank ............................ $ 8,614
Cash balance per books [from (a)]............................. $6,550

Add: EFT collection R. Nishimura ............................. 3,145
9,695
Less: NSF cheque and fee ($987 + $40) ............... $1,027
Bank service charges ................................... 45
Error in Dec. 17 deposit ($2,954 – $2,945)... 9 1,081
Reconciled cash balance per books .......................... $8,614

(c) Dec. 31 Cash ..................................................... 3,145

Accounts Receivable .................... 3,145
31 Accounts Receivable............................. 1,027

Cash ............................................. 1,027
31 Bank Charges Expense ........................ 45

Cash ............................................. 45
31 Accounts Receivable............................. 9
Cash ............................................. 9

PROBLEM 7-9B
(a) and (b)
Cash:
1. Cash on hand ........................................................................ $ 1,600
2. Bank chequing account ......................................................... 7,460
5. US dollar account (Canadian equivalent) .............................. 2,241
Total cash balance ........................................................... 11,301
Cash equivalents:
3. Government of Ontario bond ................................................ 5,000
Cash and cash equivalents............................................................ $16,301
(c) 4. The cash due from the customer should be recorded as an account
receivable, and reported as a current asset on the statement of
financial position. The remainder of the entry should update inventory
(current asset), sales (revenue), and cost of goods sold (assuming a
perpetual inventory system).
6. The deposit with Hydro One should be recorded as an advance or

deposit in the current assets section of the statement of financial
position as it is very similar to a receivable that the company hopes to
collect once the credit history is established.

PROBLEM 7-10B
(a) The security deposits were not included in cash as these amounts are not
available for use by the company. They are held in trust for the tenants and
are therefore a form of restricted cash. They are segregated on the
statement of financial position.
(b) Segregated tenants’ security deposits would most likely be classified in the
non-current assets section of the statement of financial position. Because
of the length of the related apartment leases and the operating cycle of the
business, it is unlikely that the deposits would be repaid in the current
accounting cycle.

PROBLEM 7-11B
Accelerating collection of receivables

- Currently, no deposit is received from the customers and billing is done at
the end of the contract which is four months after the contract started
- Jackie should ask customers for a large upfront deposit before the items
are purchased on behalf of the customer
- Jackie should also consider billing on a monthly basis throughout the
contract so that cash is received earlier
Delaying payment of liabilities

- Jackie is currently paying for items purchased immediately. She can apply
for credit and pay for the purchases on account, probably 30 days later
than she is currently paying

ACR7-1 ACCOUNTING CYCLE REVIEW
2018
(a) Jan. 1 Bank Loan Payable ........................................... 20,000
Interest Payable ($2,000,000 x 3% x 1/12) ....... 5,000
Cash.......................................................... 25,000
8 Cash ................................................................. 178,000
Accounts Receivable................................. 178,000
13 Accounts Receivable......................................... 216,000
Sales ......................................................... 216,000
Cost of Goods Sold ........................................... 122,000
Inventory ................................................... 122,000
15 Inventory ........................................................... 75,000
Accounts Payable ..................................... 75,000
17 Accounts Payable ............................................. 120,000

Cash.......................................................... 120,000
18 Salaries Payable ............................................... 34,000
Salaries Expense .............................................. 36,000
Cash.......................................................... 70,000
21 Supplies ........................................................... 1,500
24 Inventory ........................................................... 98,000
26 Cash ................................................................. 68,000
Accounts Receivable......................................... 58,000
Sales ......................................................... 126,000
Inventory ................................................... 68,000

ACR7-1 (CONTINUED)
(a) (Continued)
Jan. 31 Cash ($50,000 - $25,000) ................................. 25,000

Unearned Revenue ........................................... 25,000
Sales ......................................................... 50,000
Inventory ................................................... 35,000
(b) MATCHETT FABRICATIONS LTD.

Bank Reconciliation
January 31, 2018
Cash balance per bank statement ......................... $161,162

Add: Deposits in transit ........................................ 25,000
186,162
Less: Outstanding cheques .................................. 12,000
Reconciled cash balance per bank ........................ $174,162
Cash balance per books [refer to (c)]..................... $184,000
Less: NSF cheque ................................... $9,800
Bank service charges ............................... 38 9,838
Reconciled cash balance per books ...................... $174.162
Jan. 31 Bank Charges Expense ............................. 38

Cash................................................... 38
Accounts Receivable.................................. 9,800
Cash................................................... 9,800

ACR7-1 (CONTINUED)
(c) and (e)

Cash
Accumulated Depreciation—Equipment
Dec. 31, 2017 128,000 Jan. 1 25,000 Dec. 31, 2017 380,000
Jan. 8 178,000 Jan. 17 120,000 Jan. 31 31,667
Jan. 26 68,000 Jan. 18 70,000
Jan. 31 Bal. 411,667
Jan. 31 25,000
Jan. 31 184,000
Jan. 31 38 Accounts Payable
Jan. 31 9,800 Jan. 17 120,000 Dec. 31, 2017 410,000
Jan. 31 Bal. 174,162 Jan. 15 75,000
Jan. 21 1,500
Accounts Receivable Jan. 24 98,000
Dec. 31, 2017 920,000 Jan. 8 178,000 Jan. 31 Bal. 464,500
Jan. 13 216,000
Jan. 26 58,000 Interest Payable
Jan. 31 9,800 Jan. 1 5,000 Dec. 31, 2017 5,000
Bal. 31 Bal 1,025,800 Jan. 31 4,950
Jan. 31 Bal. 4,950
Supplies
Dec. 31, 2017 3,000 Salaries Payable
Jan. 21 1,500 Jan. 31 3,200 Jan. 18 34,000 Dec. 31, 2017 34,000
Bal. 31 Bal 1,300 Jan. 31 36,000
Jan. 31 Bal. 36,000
Inventory
Dec. 31, 2017 457,000 Jan. 13 122,000 Unearned Revenue
Jan. 15 75,000 Jan. 26 68,000 Jan. 31 25,000 Dec. 31, 2017 120,000
Jan. 24 98,000 Jan. 31 35,000 Jan. 31 Bal. 95,000
Jan. 31 Bal. 405,000
Income Tax Payable
Equipment Jan. 31 16,000
Dec. 31, 2017 2,280,000 Jan. 31 Bal. 16,000

ACR7-1 (CONTINUED)
(c) and (e) (continued)
Bank Loan Payable
Depreciation Expense
Jan. 1 20,000 Dec. 31, 2017 2,000,000
Jan. 31 31,667
Jan. 31 Bal. 1,980,000
Interest Expense
Common Shares
Jan. 31 4,950
Dec. 31, 2017 250,000
Supplies Expense
Retained Earnings
Jan. 31 3,200
Dec. 31, 2017 589,000
Bank Charges Expense
Sales
Jan. 31 38
Jan. 13 216,000
Jan. 26 126,000
Income Tax Expense
Jan. 31 50,000
Jan. 31 16,000
Jan. 31 Bal. 392,000
Cost of Goods Sold
Jan. 13 122,000
Jan. 26 68,000
Jan. 31 35,000
Jan. 31 Bal. 225,000
Salaries Expense
Jan. 18 36,000
Jan. 31 36,000
Jan. 31 Bal. 72,000

ACR7-1 (CONTINUED)
(d) 2018
Jan. 31 Depreciation Expense ....................................... 31,667
Accumulated Depreciation—Equipment ... 31,667
($2,280,000 ÷ 6 × 1/12 = $31,667)
31 Interest Expense ............................................... 4,950

Interest Payable .................................... 4,950
[($2,000,000 - $20,000) x 3% x 1/12)] = $4,950
31 Supplies Expense ............................................. 3,200

Supplies .................................... 3,200
($3,000 + $1,500 – $1,300 = $3,200)
31 Salaries Expense .............................................. 36,000

Salaries Payable ...................................... 36,000
31 Income Tax Expense ........................................ 16,000

Income Tax Payable ................................ 16,000

ACR7-1 (CONTINUED)
(f)
MATCHETT FABRICATIONS LTD.
Adjusted Trial Balance
January 31, 2018
o
Debit Credit
Cash $ 174,162
Accounts receivable 1,025,800
Supplies 1,300
Inventory 405,000
Equipment 2,280,000
Accumulated depreciation—equipment 411,667
Accounts payable 464,500
Interest payable 4,950
Salaries payable 36,000
Unearned revenue 95,000
Income tax payable 16,000
Bank loan payable 1,980,000
Common shares 250,000
Retained earnings 589,000
Sales 392,000
Cost of goods sold 225,000
Salaries expense 72,000
Depreciation expense 31,667
Interest expense 4,950
Supplies expense 3,200
Bank charges expense 38
Income tax expense 16,000 000000000
$4,239,117 $4,239,117

ACR7-1 (CONTINUED)
(g) (1)
Income Statement
Month Ended January 31, 2018
Sales $392,000
Cost of goods sold 225,000
Gross profit 167,000
Operating expenses
Salaries expense $72,000
Depreciation expense 31,667
Supplies expense 3,200
Bank charges expense 38
Total operating expenses 106,905
Income from operations 60,095
Other revenues and expenses
Interest expense (4,950)
Total other revenues and expenses (4,950)
Income before income tax 55,145
Income tax expense 16,000
Net income $ 39,145
(g) (2)
Statement of Changes in Equity
Month Ended January 31, 2018
Common Retained Total
Shares Earnings Equity
Balance, January 1 $250,000 $589,000 $839,000
Net income 0000 000 39,145 39,145
Balance, January 31 $250,000 $628,145 $878,145

ACR7-1 (CONTINUED)
(g) (3)
Statement of Financial Position
January 31, 2018
Assets
Current assets
Cash $ 174,162
Accounts receivable 1,025,800
Supplies 1,300
Inventory 405,000
Total current assets 1,606,262
Property, plant, and equipment
Equipment $2,280,000
Less: Accumulated depreciation 411,667 1,868,333
Total assets $3,474,595
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable $464,500
Interest payable 4,950
Salaries payable 36,000
Unearned revenue 95,000
Income tax payable 16,000
Bank loan payable – current portion * 240,000
Total current liabilities $ 856,450
Bank loan payable 1,740,000**
Total liabilities 2,596,450
Shareholders’ equity
Common shares $ 250,000
Retained earnings 628,145
Total shareholders’ equity 878,145
Total liabilities and shareholders’ equity $3,474,595
* $20,000 principal payment per month x 12 months = $240,000
** Balance $1,980,000 less current portion of $240,000 = $1,740,000
LO 3,4 BT: AP Difficulty: M Time: 90 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT7-1 FINANCIAL REPORTING CASE
(a) The second paragraph of the Management’s Responsibility for Financial

Statements clearly states that management is responsible for establishing
and maintaining an appropriate system of internal controls. In addition, a
statement is made in this paragraph that the role of internal auditors of the
company is to perform a review and evaluation of internal controls to provide
management with the reasonable assurance that assets are safeguarded,
transactions are authorized and recorded and that the financial records are
reliable.
In the Independent Auditor’s Report, the auditor considers the internal

controls relevant to the company’s preparation and fair presentation of the
financial statements. Following this study of internal controls, the auditor
designs audit procedures that are appropriate under the circumstances in
order to express an opinion on the financial statements.
(b) Management has the primary responsibility for the system of internal control
as indicated in the answer to (a) above. The auditor points out in the second
paragraph of the Independent Auditor’s Report that management is
responsible for internal control that will enable the preparation of consolidated
financial statements that are free from material misstatement, whether due
to fraud or error. The auditor is not responsible for the design or effectiveness
of internal controls and does not express an opinion as to their effectiveness.
Nonetheless, the auditor does consider the internal controls in the design of
their audit, as noted in (a) above.
(c) Management has the primary responsibility for the preparation and
presentation of the financial statements. This responsibility is mentioned in
both reports. The very first sentence of the Management’s Responsibility for
Financial Statements states this responsibility and then the auditor repeats
the statement in the second paragraph of the auditor’s report.
LO 1 BT: C Difficulty: M Time: 15 min. AACSB: Communication CPA: cpa-t001, cpa-t004

CM: Reporting and Audit

(a) North West’s cash reported at January 31, 2016 is $37,243,000.
(b) Sobeys reported cash and cash equivalents at May 7, 2016 of $258.8
million.
(c) North West Cash January 31, 2016 $37,243,000

North West Cash January 31, 2015 29,129,000
Increase in cash for 2016 8,114,000
Increase as a % ($8,114 ÷ $29,129) 27.9%
Sobeys May 7, 2016 $258,800,000

Sobeys May 2, 2015 295,600,000
Decrease in CCE (36,800,000)
Decrease as a % ($36,800 ÷ $295,600) 12.4%
North West’s cash position has improved while Sobeys’ has declined.
LO 4 BT: C Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

(a) Generally, the accounting standards a company follows should not have a
significant impact on its internal controls. However, since IFRS is more
principles-based and relies more upon professional judgment than ASPE,
companies need to have controls in place to assess decisions that have
been made when making various calculations. These types of controls
would rely heavily upon review, reconciliation, and approval.
(b) Strong internal controls are essential for proper recording of transactions
and the preparation of financial statements to ensure the usefulness of this
information for decision-making by external users. Publicly traded
companies have more external users of their financial statements than do
private companies. By reporting on the effectiveness of their internal
controls over financial reporting, public companies provide their
stakeholders with important information on the quality of the process used
to produce the financial statements. Also, because management must
prepare a report, it must assess the effectiveness of controls on an ongoing
basis. Many people argue that this will help identify any weaknesses in the
systems, as well as fraud and error, on a timely basis.
LO 1 BT: C Difficulty: M Time: 15 min. AACSB: Communication CPA: cpa-t001 CM: Reporting

CT7-4 PROFESSIONAL JUDGEMENT CASE
(a) Vanessa should report several internal control weaknesses for the hotel
operations to her father Patrick Chen:
1. For the room rental portion of operations:
• The opportunity exists for unrecorded room rental revenues.
Patrons who pay cash may have access and use of the room but
the revenue from the rental remains unreported and the desk clerk
pockets the cash collected.
• Friends can gain access to rooms and related services without any
charges and without any revenue to the hotel.
2. For bar revenues:

• The bartender has the opportunity to bring in inventory purchased
personally and resold at the bar, while keeping the cash receipts
from sales.
• Revenue from bar sales may go unrecorded as the bartender is
too busy to enter sales in the cash register.
3. For parking lot revenues:

• The opportunity exists for the attendant to understate the amount
of parking revenue collected, while pocketing the cash.
• Friends of the attendant may be allowed parking without having to
pay any fees.
(b) It will not always be possible to establish how much money has been lost
or stolen from the hotel. While some errors or omissions can be measured,
such as room rentals, unrecorded liquor sales will be very difficult to
measure since the liquor sold may not have come from inventory
purchased.

CT7-4 (CONTINUED)
(c) A general recommendation concerning hiring family members applies in this

case for all of the hotel’s operations. Collusion between management and
its employees to defraud the hotel is heightened when the employees are
members of the general manager’s family. In addition, the following steps
can be taken to avoid the possibility of fraud in the future:
1. For the room rental portion of operations:

• A daily reconciliation should be prepared, by someone other
than the desk clerk, which compares the report for the number
of rooms cleaned to the number of room rented.
2. For bar revenues:

• A division of duty should be established between the person
having access to inventory and the person handling cash
receipts.
• Supervision of the handling of the inventory and the handling
of the cash should be done whenever possible. Any change in
the normal procedures, such as was the case in the handling
of the tequila, should be cause for termination.
• A daily check should be made comparing the amount of
revenues reported from bar sales to the inventory consumed.
3. For parking lot revenues:

• Install the automated payment system which will remove the
attendant’s opportunity to understate revenues and pocket
cash.
LO 1,2 BT: S Difficulty: C Time: 40 min. AACSB: Communication CPA: cpa-t001 CM: Reporting

CT7-5 ETHICS CASE
(a) The stakeholders are the customers affected by the policy, the shareholders
of the banks who want to see higher net income, and the management of the
banks who make the decisions regarding fees and cheque processing
policies.
(b) (1) If the bank processes cheque #3158 for $1,510 first it will bounce due
to non-sufficient funds as the balance in the account is only $1,500. All
of the other cheques to be processed after that will also bounce so
consequently all 5 cheques will bounce and the total NSF processing
fees charged by the bank will be $225 (5 × $45).
(2) If the bank processes the smallest cheques first, the 3 smallest cheques
will clear processing and the 2 largest ones will bounce. By processing
the cheques in this way, the bank will earn a processing fee of only $90
(2 x $45).
(c) Whether this is ethical is subject to debate. On the one hand, it can be argued
that customers have a responsibility to maintain an adequate balance in their
accounts. Some customers are frequently overdrawn; thus only severe
penalties will persuade them to maintain an adequate balance. However, it
could also be argued that processing cheques from largest to smallest is
“gouging” and takes unfair advantage of the customer.
(d) In deciding what approach to take, the bank must consider its relationship
with the customer. For customers who do not write NSF cheques frequently,
it probably does not matter which approach is taken. Any customer that is
frequently overdrawn may not be the type of customer that the bank is willing
to deal with over the long term so it may be beneficial to other account holders
to treat those who are always overdrawn as severely as possible. If the
“largest to smallest” policy is used by all banks, customers won’t gain an
advantage by switching accounts to other banks if this policy angers them.
(e) Answer will vary depending on students’ opinions.
LO 4 BT: E Difficulty: M Time: 30 min. AACSB: Ethics and Analysis CPA: cpa-t001, cpa-e001 CM:
Reporting and Ethics

CT7-6 SERIAL CASE
Note to instructors: All of the material supplementing this group activity,

including a suggested solution, can be found in the Collaborative Learning
section of the Instructor Resource site accompanying this textbook as well as in
the Prepare and Present section of WileyPLUS.
(a) The strengths in ABC’s system of internal control and related control
activity are as follows:
Strength Control Activity
1. Password access to the cash register Physical controls
Cash register calculates the pricing of the Documentation

goods and prints receipt
2. Cash is deposited daily Physical controls
Owners are involved in the reconciliation Review and reconciliation

of cash with totals from the cash register
3. Inventory is counted monthly Review and reconciliation
Doug or Bev authorize the purchase of Assignment of responsibility

inventory
4. The monthly payroll schedule is Review and reconciliation
reconciled to actual salaries paid
5. Invoices are prepared when the services Documentation
have been performed

CT7-6 (CONTINUED)
(b) The weaknesses in ABC’s system of internal control and the control
activities violated are as follows:
Weaknesses Control Activity
1. Employees share one cash register and Assignment of responsibility

management currently is unable to affix
responsibility for cash to a specific
employee
Cashier is handling cash and inventory Segregation of duties
Entering transactions can be performed Physical controls

by incorrect cashier, due to no logging off
No mention of supervision of employees Segregation of duties
entering sales and handling inventory
No mention of procedures for voided Assignment of responsibility
transactions or pricing adjustments on
sales
2. Reconciliation of sales is not done daily Review and reconciliation
and so one cannot establish who has
made an error on a sale
3. Inventory is counted monthly to determine Review and reconciliation
what products to reorder, but should also
be used to determine unrecorded sales
No system in place to avoid duplication of Review and reconciliation
purchases
4. Documentation of authorized overtime is Documentation
not obtained
5. Invoices for services are not prenumbered Documentation
Invoices are not issued in duplicate - Documentation

photocopies have to be made and if staff
forget to make a photocopy, sales could
go unrecorded

CT7-6 (CONTINUED)
(b) (continued)
In order to address the weaknesses, improvements that ABC’s management

should consider include:
1. Program the cash register such that a new transaction cannot be

entered without the operator logging off from the previous transaction.
2. Reconcile the sales to the deposit daily and establish the responsibility
of errors to the particular employee causing the error.
3. Provide supervision of employees or install cameras to ensure that all
sales are recorded.
4. Design procedures involving owners for voiding or altering the pricing for
transactions entered.
5. Compare and reconcile the reduction of inventory to the sales recorded
daily.
6. Implement the use of pre-numbered invoices that are printed in duplicate
copies that cannot be altered.
7. Account for the numerical sequence of invoices.
8. Consider automating the production of invoices.
9. Install a log of purchase orders made to avoid duplication of orders.
LO 1,2 BT: Difficulty: C Time: 50 min. AACSB: Communication CPA CM: Reporting

Legal Notice
Copyright © 2017 by John Wiley & Sons Canada, Ltd. or related companies. All
rights reserved.
The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.
The material provided herein may not be downloaded, reproduced, stored in a

retrieval system, modified, made available on a network, used to create derivative
works, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, scanning, or otherwise without the prior written
permission of John Wiley & Sons Canada, Ltd.
(MMXVII VI F2)


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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

Solutions Manual -1 Chapter 7

AACSB Association to Advance Collegiate Schools of Business

Solutions Manual -2 Chapter 7

A control environment encourages integrity and a high standard of ethical

2. Management is responsible for establishing a company’s control

3. When designing and explaining to all employees the system of internal

Solutions Manual -3 Chapter 7

5. Documentation procedures contribute to good internal control by providing

6. Independent review and reconciliation by internal auditors is necessary

7. External auditors are required to be independent of the organization they

Solutions Manual -4 Chapter 7

8. A company’s system of internal control can only give reasonable

9. Collusion occurs when two or more employees agree to circumvent

11. This is a violation of the assignment of responsibility control activity. Each

Solutions Manual -5 Chapter 7

13. This statement is true if the alternative to a cheque payment is a cash

14. The receptionist has an opportunity to commit fraud. In the case of an

Solutions Manual -6 Chapter 7

Solutions Manual -7 Chapter 7

20. When performing a bank reconciliation, outstanding cheques are subtracted

Solutions Manual -8 Chapter 7

Solutions Manual -9 Chapter 7

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 7-1

Control Activity Example

Segregation of duties Tickets are provided to those entering the

Documentation The time on the ticket is entered into a machine

Physical controls Cash is kept in a cash register.

Review and reconciliation If a customer is overcharged, they will complain.

Solutions Manual -10 Chapter 7

BRIEF EXERCISE 7-2

(a) 3 All transactions should include original, detailed receipts.

BRIEF EXERCISE 7-3

1. Documentation and physical controls

BRIEF EXERCISE 7-4

Solutions Manual -11 Chapter 7

BRIEF EXERCISE 7-5

BRIEF EXERCISE 7-6

January deposits in transit:

Deposits in transit at beginning of month ........................................... $ 0

February deposits in transit:

Deposits in transit at beginning of month ........................................... $1,000

Solutions Manual -12 Chapter 7

BRIEF EXERCISE 7-7

November outstanding cheques:

Outstanding cheques at beginning of month ..................................... $ 0

December outstanding cheques:

Outstanding cheques at beginning of month ..................................... $1,200

BRIEF EXERCISE 7-8

(b) Accounts Payable ..................................................................... 90

No entry is necessary for the cheque mistakenly deducted by the bank,

Solutions Manual -13 Chapter 7

BRIEF EXERCISE 7-9

BRIEF EXERCISE 7-10

Cash balance per bank $19,260

Cash balance per books (as per BE7-9) $16,320

Solutions Manual -14 Chapter 7

BRIEF EXERCISE 7-11

July 31 Cash ......................................................................... 2,170

Bank Charges Expense ............................................ 90

Accounts Receivable ................................................ 1,320