DO IT!

Review Chapter 7
1. Identify which control activity is violated in each of the following situations, and
explain how the situation creates an opportunity for fraud or inappropriate
accounting practices.
a. Once a month, the sales department sends sales invoices to the accounting
department to be recorded.
Answer
Violates the control activity of documentation procedures. Source
documents should be promptly forwarded to the accounting department so
accounting entries can be made. This control activity helps to ensure the
timely recording of sales transactions and contributes directly to the
accuracy and reliability of the accounting records.
b. Angela Marino orders merchandise for Lake Como SpA; she also receives
the merchandise and authorizes payment for merchandise.
Answer
Violates the control activity of segregation of duties. Different individuals
should be responsible for related activities, such as these three related
purchasing activities. Many cases of abuse could occur: placing orders with
friends and getting kickbacks; performing cursory counts and inspections
of delivered goods; approving fictitious invoices for payment.
c. Several clerks at Esposito’s Foods use the same cash register drawer.
Answer
Violates the control activity of establishment of responsibility. Esposito’s
Foods would be unable to determine who was responsible for a cash
shortage; this lapse could even encourage employee theft.
2. Eric Nilsen is concerned with control over mail receipts at Midtown Sporting
Goods. All mail receipts are opened by Arne Johansen. Arne sends the checks to
the accounting department, where they are stamped “For Deposit Only.” The
accounting department records and deposits the mail receipts weekly. Eric asks for
your help in installing a good system of internal control over mail receipts.
Answer
 All mail receipts should be opened in the presence of two mail clerks. Those mail
clerks should immediately stamp each check “For Deposit Only.” The mail clerks
should prepare, in triplicate, a list of the checks received each day. The checks and
list should be sent to the cashier’s department each day, and the cashier should
deposit the checks daily. The triplicate list should be sent to the treasurer’s
department and used to confirm that all receipts were deposited and recorded.
3. Arvel Ltd. established a £100 petty cash fund on August 1. On August 31, the fund
had £6 cash remaining and petty cash receipts for postage £31, office supplies £44,
and miscellaneous expenses £16. Prepare journal entries to establish the fund on
August 1 and replenish the fund on August 31.
Answer
Aug 1
Petty Cash 100
Cash 100
Aug 31
Postage Expense 31
Supplies 44
Miscellaneous 16
Cash Over and Short 3
Cash (100-6) 94
4. Ryou Kato owns Kato Blankets. Ryou asks you to explain how he should treat the
following reconciling items when reconciling the company’s bank account.
a. Outstanding checks.
b. A deposit in transit.
c. The bank charged to the company account a check written by another
company.
d. A debit memorandum for a bank service charge.

Answer

a. Outstanding checks: Deduct from the balance per bank.

b. A deposit in transit: Add to the balance per bank.
 c. The bank charged to our account a check written by another company: Add
to the balance per bank.
d. A debit memorandum for a bank service charge: Deduct from the balance
per book.
5. Indicate whether each of the following statements is true or false.
a. A company has the following assets at the end of the year: cash on hand
$40,000, cash refund due from a customer of $30,000, and a checking
account balance of $22,000. Cash and cash equivalents are therefore
$62,000.
b. A company that has received NSF checks should report these checks as a
current liability on the statement of financial position.
c. Restricted cash that is a current asset is reported as part of cash and cash
equivalents.
d. A company has cash in the bank of $50,000, petty cash of $400, and share
investments of $100,000. Total cash and cash equivalents are therefore
$50,400.

Answer

a. True
b. False. A company that has received NSF checks should report these checks as
a current asset (accounts receivable) on the statement of financial position.
c. False. Restricted cash that is a current asset is not reported as part of cash and
cash equivalents.
d. True.