Chapter 8 Solutions

Chapter 8
Internal Control and Cash
Questions
1. Safeguarding assets and records is the most fundamental of internal
control features because the entity must safeguard its assets and records
if it is to survive. Providing accurate, reliable information, optimizing
the use of resources, and preventing and detecting error and fraud are
important, but they are not as critical as safeguarding assets.
2. Management (owners and managers) of a company bears primary
responsibility for the company’s financial statements as disclosed in the
annual report and for maintaining its system of internal control.
Managers review the internal control system for effectiveness, policies
and guidelines, and select and train qualified personnel. Internal control
is a management priority. The owners of the company set the goals.
Management is responsible for developing, implementing and ensuring
compliance with the internal control. Integral to the success of internal
control systems is the selection and training of qualified personnel.
3. Seven features of an effective system of internal control are
(1) competent, reliable and ethical personnel, (2) assigned
responsibilities, (3) proper authorization, (4) separation of duties, (5)
internal and external audits, (6) documents and records, and (7)
electronic and computer controls, and other controls. Possible limits or
weaknesses could be collusion, cost/benefit, too restrictive.
4. Three key elements of separation of duties are (1) separation of
operations from accounting, (2) separation of the custody of assets from
accounting, and (3) separation of the authorization of transactions from
the custody of related assets.
5. An audit is an examination of an organization’s financial statements and
the accounting systems, controls, and records that produced them.
Internal audits are performed by employees to ensure controls are being
followed. External audits are performed by independent auditors hired
by the organization to determine if the financial statements are prepared
in accordance with GAAP.
Copyright © 2017 Pearson Canada Inc.

Horngren’s Accounting, 10Ce Chapter 8 Instructor’s Solutions Manual
6. Business documents and records provide the details of business

transactions. Documents such as sales invoices, purchase orders and
cheques should be prenumbered. A gap in a numbered sequence draws
attention to a possible error or omission.
7. Evaluated Receipt Settlement (ERS) is a streamlined payment
procedure that compresses the approval process into a single step:
comparing the receiving report with the purchase order. This procedure
saves the accounting department time as routine purchases can be
processed electronically allowing time for more complex tasks.
8. The same employees should not write the computer programs for cash
payments, sign cheques, and mail the cheques to payees because they
could program the computer to write cheques to themselves. They could
then sign the cheques and mail them. Concentrating all these duties with
one employee makes it easy for that person to steal cash.
9. The bank account acts as a control device because banks have
established practices for safeguarding cash. Also, banks provide
depositors with detailed records of cash transactions. Banks use the
signature card to verify signatures on documents and thus protect the
bank and the depositor against forgery. The deposit slip serves as a
proof of receipt for a deposit made in a bank account. This document
describes the details of the deposit. The bank statement provides a
record of each transaction that affected the account during the period.
10. Internal control systems are not usually designed to be foolproof and
perfect because of cost constraints. Internal controls are designed to be
effective and consistent, not to guarantee foolproof, perfect
performance. Two fundamental constraints are red tape, which may
strangle business operations, and the cost of the system. The benefits of
the system should exceed its costs.
11. Internal controls can be circumvented by collusion between two or more
individuals intent on beating internal controls and defrauding the
system.
12. b Outstanding cheque a Deposit in transit
d NSF cheque c Bank collection
d Bank service charge d EFT payment
d Cost of printed cheques d Customer’s cheque returned
c EFT receipt because of unauthorized
signature
a Bank error that decreased d Book error that increased
bank balance balance of Cash account
8-640 Copyright © 2017 Pearson Canada Inc.

13. A bank reconciliation explains the reason for differences between the
book and bank balances of the depositor’s cash in the bank account at a
certain date. It ensures that all cash transactions have been accounted
for and that the bank and book records of cash are correct.
14. A cash register controls cash receipts. It is a security device because a
tape is locked inside or a link to a central computer records the amount
of each transaction entered through the machine. By making periodic
comparisons of cash on hand against the tape inside the machine or the
data in the central computer, management discourages theft.
15. A mailroom employee should open incoming mail. The actual cash
receipts should be given to the treasurer, who has the cashier make the
bank deposit.
The remittance advices are forwarded to the accounting department.
Their information is entered in the cash receipts journal and posted to
customers’ accounts in the accounts receivable ledger. In the final step,
the controller compares the two records of the day’s cash receipts:
(1) bank deposit amount from the treasurer; and (2) debit to Cash from
the accounting department.
16. An effective system of internal control for cash receipts over the counter
should include the following:
 A cash register should always be used, positioned so that customers
can see the amounts the cashier enters into the register.
 A tape should be locked inside the register, with access by
management only. A copy of the receipt should be given to each
customer.
 The cash drawer should open only when the sales clerk has entered
an amount on the keys in order for the tape to indicate the
transaction.
 At the end of each day, a manager should prove the cash by
comparing the total amount in the cash drawer against the tape's
total.
 Merchandise should be priced at uneven amounts, requiring the
clerk to make changes, necessitating that the drawer be opened up.
 The cash should be deposited into the bank at the end of each day by
the person assigned this responsibility.
 The tape goes to the accounting department as the basis for an entry
in the cash receipts journal.
 Periodic surprise inspections should be made by management.
Copyright © 2017 Pearson Canada Inc. 8-641

17. The invoice, the receiving report, and the purchase order make up the
payment packet. Three accounting department procedures that use the
payment packet to ensure that each payment is appropriate are;
a. The invoice is compared to a copy of the purchase order to ensure
that the business pays only for the goods ordered. A purchasing
agent prepares the purchase order and mails it to the supplier as the
first step in the purchase transaction.
b. The invoice is compared to the receiving report to ensure that cash
is paid only for the goods actually received. The receiving
department prepares the receiving report when the goods arrive.
c. After the accounting department checks all these documents, a
cheque is sent. The person signing the cheque punches a hole
through the whole payment packet or in some other way indicates
that the process is complete so the payment packet cannot be
submitted more than once for payment.
18. The Petty Cash account keeps its opening cash fund balance at all times.
This balance does not always equal the amount of cash in the fund. The
two amounts are equal immediately after the fund has been opened or
replenished. At other times, when payments have been made from the
fund, the balance in the account should equal the amount of cash in the
Petty Cash fund plus the total payment tickets.
19. This company would likely report all of the amounts as a single
figure—Cash—because each amount is cash or liquid enough to be
considered cash.
20. Accountants should generally adhere to a higher standard of ethical
conduct than other members of society because accountants agree to
abide by the codes of professional conduct of their respective
organizations. Accounting bodies are self-regulating as the work of
professionals is difficult to judge, so the Canadian Institute of Chartered
Accountants, the Society of Management Accountants, and the Certified
General Accountants Association now merged as Certified Professional
Accountants manage their own members.
21. The policy of requiring managers to meet profit goals, whatever the
means, can encourage unethical conduct. For example, a manager
facing the prospect of losing her job because of low productivity may
falsify sales or other performance measures. If top management were
more understanding, employees would probably behave more ethically.
Shifts in consumer demand or other factors beyond the manager’s
control may explain her results, and top managers are wise to focus
employees’ attention on ethical conduct and good performance.

Starters
(5 min.) S 8-1
Safeguarding assets is most important because all organizations need assets to survive.
(5 min.) S 8-2
The Sarbanes-Oxley Act of 2002 requires public companies in the U.S., major suppliers of
U.S. companies, Canadian subsidiaries of U.S. companies, and Canadian companies listed
on American stock exchanges to issue an internal control report, and the outside auditor
must evaluate the client’s internal controls.
Dodd-Frank amended the Sarbanes-Oxley Act (SOX), granting the authority for the Public
Company Accounting Oversight Board (PCAOB) to now inspect foreign audit firms that
practice in the U.S. or have U.S. clients. For example, any registered public accounting firm
(domestic or foreign) that relies, in whole or in part, on the work of a foreign public
accounting firm in issuing an audit report, performing audit work or conducting an interim
review must:
 Produce the foreign firm’s audit work papers and all related documents if the SEC
or PCAOB requests them; and
 Secure the foreign firm’s agreement to produce those documents as a condition of
relying on the work of that firm.
The general international impact of Dodd-Frank is on external auditors and preparers who
must comply with SOX, as amended by the Dodd-Frank Act, because they are employed or
engaged by international/global public companies that list on U.S. exchanges.
(5-10 min.) S 8-3

Separation of duties is essential for safeguarding assets. The person who has custody of an
asset should not also account for the asset. With both duties, the person can steal the asset
and hide the theft by making a false entry in the accounting records.

(5 min.) S 8-4
Differences:
1. External auditors are entirely independent of the business. Internal auditors are
employees of the business.
2. External audits are designed to determine whether the company’s financial statements
are prepared in accordance with ASPE or IFRS.
Internal audits are designed to ensure that employees follow company policies and that
operations run efficiently.
Similarities:
1. Both types of auditors suggest improvements that help the business run more
efficiently.
2. Both types of auditors determine whether the company is following legal requirements.
(5 min.) S 8-5
1. A bank reconciliation is neither a journal, a ledger, an account, nor a financial
statement. Instead, it is an accountant’s tool, separate from the company’s books, that
explains all differences between the firm’s cash records and the bank statement figures.
It should be set up and completed in an organized format similar to the examples in the
textbook. This allows for the bank reconciliation to be easily reviewed by the auditors
and other authorized stakeholders.
2. A bank statement is the document the bank uses to report what it did with the
depositor’s cash. The statement shows the bank account’s beginning and ending cash
balances, receipts (deposits and other receipts) and payments (cheques, etc., and other
payments).
A bank reconciliation is a document prepared by the company (not by the bank) to
explain all differences between the company’s cash records and the bank statement
figures. The bank reconciliation ensures that all cash transactions have been accounted
for, and that the bank and book records of cash are correct.
(5 min.) S 8-6
Outstanding cheques at the end of July: $4,520 – $3,760 = $760
Outstanding cheques at the end of August: ($6,340 + $760) – $2,580 = $4,520

(10 min.) S 8-7

Hunter Security Systems
Bank Reconciliation
May 31, 2017
BANK BOOKS
Balance, May 31 $7,600 Balance, May 31 $4,960
Add: Add:
Deposit in transit 400 Bank collection 1,260
8,000 Interest revenue 20
6,240
Less: Less:
Outstanding cheques (1,800) Service charge (40)
Adjusted bank balance $6,200 Adjusted book balance $6,200
Amounts agree
(5 min.) S 8-8
General Journal
DATE POST.
2017 ACCOUNT TITLES AND EXPLANATIONS REF. DEBIT CREDIT
May 31 Cash 1,260
Accounts Receivable—Kelly Brooks 1,260
Collection on account.
31 Cash 20
Interest Revenue 20
Interest earned on bank balance.
31 Bank Charges Expense 40

Cash 40
Bank service charge. 85,750

(5 min.) S 8-9
1. There is a weakness in internal control over cash receipts.

 The cash register does not keep an internal record of sales.
 The clerk counts the cash in the cash drawer at the end of the day.
2. To prevent these weaknesses, the following controls should be implemented:

 Have a manager count the cash in the cash drawer at the end of the day and
compare it to the register tape.
 The cash register should keep an internal record of the sale.
 The register tape should go to the accounting department to record the cash and
sale in the journal.
(5 min.) S 8-10
The cash in the cash drawer will be $300 lower than the total amount recorded by the
cash register.
(5-10 min.) S 8-11

The controller compares the records of the day’s cash receipts, as follows:
1. Bank deposit amount from the treasurer
2. Debit to Cash from the accounting department
This comparison ensures that the debit to Cash equals the amount deposited in the bank.
(5 min.) S 8-12
A dishonest purchasing agent could:
 Purchase goods and have them delivered to his home.
 Approve payment for the goods delivered to his home for an excessive amount
and split the excess with the supplier.
Companies avoid this internal control weakness by separating the following duties:
 purchasing goods
 receiving goods
 approving payment for goods

(10 min.) S 8-13

General Journal
POST.
DATE ACCOUNT TITLES AND EXPLANATIONS REF. DEBIT CREDIT
Apr. 1 Petty Cash 200
Cash 200
30 Office Supplies 117

Entertainment Expense 70
Cash 181
Cash Short and Over 6
(5 min.) S 8-14
Brennan should report the errors to Stone, because Stone is her supervisor, and Stone is
responsible for the errors. If Stone fails to take action, then Brennan should report the errors
to Stone’s superior or the owner of the business. In any event, outsiders who are relying on
Dublin Co.’s financial statements must be made aware of the need to correct the reported
net income figure, although it is not Brennan’s responsibility to notify outsiders.

Exercises
(10 min.) E 8-1

Dodd-Frank amended the Sarbanes-Oxley Act (SOX), granting the authority
for the Public Company Accounting Oversight Board (PCAOB) to now
inspect foreign audit firms that practice in the U.S. or have U.S. clients.
Since Gildan is a Canadian company listed on the New York stock exchange
and has operations in the U.S. it must comply with these regulations.
(10 min.) E 8-2

1. The store clerk can issue a fictitious return slip and pay himself/herself
the money.
Having store clerks place returned goods back on the shelf or on the floor
provides no way to link the returned merchandise to cash refunds paid to
customers.
2. Yorkshire should have the store clerk keep all returned merchandise for
review by a manager. The manager can match the returned goods to the
return slips issued by the clerk and agree the value of returns to cash out
from the cash register. The clerk should also take the customer’s name
and phone number, and have the customer sign the return slip to help
ensure the customer was legitimate. The policy should also require that
the customer hands in the original bill of sale, a copy of which should be
attached to the return slip.
(10 min.) E 8-3

Baring’s internal control weakness was a lack of separation of duties. The
details of the BSS situation outline how Leeson had control and authority
over all BSS assets. As a result he was able to take unauthorized speculative
positions and hide the trading in an unused error account on the BSS Balance
Sheet.
Baring could have avoided the loss by separating the responsibilities of
general manager and head trader. If Baring had not ignored their internal
auditors and reviewed the error account, the losses would have been
identified before growing so large and enough to bankrupt the parent
company. Baring could have also had its external auditors review the bank’s
safeguards and internal controls.

(10-15 min.) E 8-4
a. Weakness. The control environment will not be as effective as it would

be if top management led in establishing internal controls.
b. Weakness. The accounting department should not be allowed to order
merchandise. An accountant could have goods sent to his or her home
or other location, then approve payment for the goods.
c. Weakness. The sales clerk should not have access to the total recorded
by the machine. The clerk could steal cash and delete a cash receipt
from the machine record.
d. Weakness. The vice-president should examine the payment packet to
ensure that the payment is valid and for the correct amount. Note: He or
she may have to do this on a sample basis if there is a large number of
cheques to sign.
(10-15 min.) E 8-5

The missing internal control characteristic in each situation is as follows:
a. Separation of duties (same person ordering merchandise and approving
payment).
b. Separation of duties (same person selling tickets and taking tickets).
c. Other controls (no job rotation).
d. Other controls (not depositing cash soon enough for adequate security).
e. Documents and records (no receiving report).
f. Separation of duties (signing authority alone does not provide adequate
internal control).
g. Competent, reliable and ethical personnel (this is too large a
responsibility for a young teen to manage)

(5-10 min.) E 8-6

1. Having a cheque signer cancel supporting documents is intended to
reduce the opportunity for fraud. Without this control procedure, a
dishonest employee could resubmit the supporting documents for
payment a second time. The employee could change the payee’s address
and have the cheque sent to an address that the employee controls. Or
the employee could arrange to have the second payee split the second
payment with the employee. Cancelling the documents immediately
upon payment makes it difficult to get the payment approved for a
duplicate payment.
2. Separation of duties is important because it limits the chances for fraud
(loss of assets) and also promotes the accuracy of accounting records.
This allows managers to rely on the accounting records to produce
information useful for operating the business.
3. Cash is important, not because of its amount as reported on the balance
sheet, but because of its effect on a business. For example, all
transactions ultimately affect cash. Businesses purchase assets and must
pay cash. They make sales and collect cash. All expenses ultimately
require cash. Also, cash is susceptible to theft because it is the medium
of exchange. Financial distress is usually accompanied by a shortage of
cash. These factors combine to give cash more importance than its
account balance would suggest.
4. Managers are more concerned about safeguarding assets because most
businesses cannot operate without assets. At a minimum, the business
needs cash to purchase goods for resale and to pay employee salaries
and other bills. Therefore, managers must safeguard the company’s
assets, or it will go out of business.
Auditors are more concerned about the quality of the accounting records
for two reasons. The final product of the records is the set of financial
statements on which the auditors express an opinion. To arrive at the
audit opinion, the auditors must rely on accounting records. If the
records are reliable, auditors can limit their work by not having to
examine every transaction and thereby reduce the cost of the audit.
(5 min.) E 8-7
Cash balance = $3,250 + $3,000 + $5,000 + $250 + $500 = $12,000

(5 min.) E 8-8
1. a. 4
b. 3
c. 2
d. 1
e. 1
f. 2
g. 2
h. 3
i. 4
j. 1
k. 4
2. (a) Items c, d, e, f, g and j will require adjusting journal entries to the companies
records. (b) Since the other items are corrections to the bank balance, it is assumed
that the corrections to the bank will occur as these missed items are processed in the
normal course of business and the errors will be corrected by the bank.

(10–20 min.) E 8-9

Adams Enterprises
General ledger:
Balance, January 1, 2017 $ 0

Add: deposits in January 143,600
143,600
Deduct: Cash payments 129,000
Balance, January 31, 2017 $14,600
Adams Enterprises
Bank Reconciliation
January 31, 2017
BANK:
Bank Balance, January 31, 2017 $17,960
Add: Deposit in transit 25,600
Less: Outstanding cheques:
Cheque 003 $10,000
Cheque 005 17,000 (27,000)
Less: Bank error correction (2,000)
Adjusted bank balance, January 31, 2017 $14,560
BOOKS:
Book Balance, January 31, 2017 $14,600
Add: Interest 8
Less: Service charge (48) (40)
Adjusted book balance, January 31, 2017 $14,560

(10–20 min.) E 8-10

Inkameep Travel
Inkameep Travel
Bank Reconciliation
October 31, 2017
BANK:
Bank Balance, October 31, 2017 $16,764
Add: Reversal of $120 service charge 120
Cheque 236 $3,300
Cheque 237 4,750 (8,050)
Adjusted bank balance, October 31, 2017 $19,334
BOOKS:
Book Balance, October 31, 2017 $19,450
Add: Interest 4
Less: Service charge (120) (116)
Adjusted book balance, October 31, 2017 $19,334

(10-20 min.) E 8-11

Bobbie Brown
Bobbie Brown
Bank Reconciliation
July 31, 2017
BANK:
Bank Balance, July 31, 2017 $ 3,088
Cheque 626 $ 132
Cheque 627 2,932 (3,064)
Adjusted bank balance $17,356
BOOKS:
Book Balance, July 31 $17,480
Less: Correction of book error––Recorded $316 cheque

as $276 $ 40
Cost of cheques 52
Service charge 32 (124)
Adjusted book balance $17,356
Bobbie Brown has cash of $17,356 on July 31, 2017.

(10-20 min.) E 8-12

Roger Snieder
Roger Snieder
Bank Reconciliation
May 31, 2017
BANK:
Bank Balance, May 31, 2017 $46,880
63,000
Less: Outstanding cheques (1,432)
Adjusted bank balance $61,568
BOOKS:
Book Balance, May 31, 2017 $62,040
Add: EFT collection––rent 3,200
$65,240
Less: Service charge $ 120
NSF cheques 2,760
Charge for printed cheques 200
Correction of book error––recorded $880 cheque
as $288 592 (3,672)
Adjusted book balance $61,568

(10-15 min.) E 8-13

General Journal
DATE POST.
May 31 Cash 3,200
Rent Revenue 3,200
EFT collection of rent.
31 Bank Charges Expense ($120 + $200) 320

Cash 320
Bank service charge and charge for
printed cheques
31 Accounts Receivable 2,760

Cash 2,760
NSF cheques returned by bank.
31 Salary Expense ($880 – $288) 592

Cash 592
Correction of book error.
(5-15 min.) E 8-14

Outstanding cheques at the end of February: $6,532 – $5,220 = $1,312
Outstanding cheques at the end of March: $1,312 + 9,764 – 8,223 = $ 2,853

(5-15 min.) E 8-15

1. The way to approach this question is to piece together what the book
balance should be using the data provided;
Book ? Bank Balance $36,938
Note collected 2,500 No o/s deposits —
Interest earned 500
Service charges 80 Deduct o/s cheques 6,450
Reconciled Balance *$30,488 $30,488
*assumed that this amount is the same as bank side.
To solve book beginning balance: $30,488 + $80 – $500 – $2,500 =

$27,568
We should have according to our calculations $27,568 showing in our

cash general ledger account however we actually have $31,000 which
means that the clerk has stolen $3,432.
2. The most important control that would prevent this theft is the duties of
cash handling and cash record keeping should be kept separate. Other
controls such as hiring competent ethical personnel, bonding cashiers,
and electronic devices and computer controls such as matching deposits
with cash register records and using electronic cash registers to process
sales could have all prevented or detected this theft. Internal and external
audits would eventually detect the theft but it may not be as timely as the
daily procedures mentioned.

(5-15 min.) E 8-16

The most likely way a person would manipulate a bank reconciliation to
cover a theft is by understating the dollar amount of the outstanding cheques.
These are the most numerous items on the bank reconciliation and thus the
place where a manipulation would be hardest to detect.
Using the data from Exercise 18-15, the book balance shows that I need to
reconcile to $30,488. If $1,000 has been stolen then the bank balance will
reflect that by indicating $35,938 instead to 36,938. So in order to reconcile
to $30,488 I need to understate 0/s cheques $1,000.
Example:
Book $27,568 Bank Balance $35,938
Note collected 2,500 No o/s deposits —
Interest earned 500
Service charges 80 Deduct o/s cheques 5,450
Reconciled Balance *$30,488

This theft could have been avoided by having someone besides the treasurer
perform the bank reconciliation. Treasurers manage cash and should
therefore have no accounting duties, such as the preparation of the
reconciliation.
Instructional Note: Student responses probably will not include this
numerical example.
(10-15 min.) E 8-17

TO: Trent Simon
There is a weakness in internal control over cash receipts from customers.
The cash registers do not keep a record of sales. With no record of sales
locked in the cash register, there is no way to determine how much cash
should be in the cash drawer. This omission makes it easy for the cashier to
steal cash and not get caught. To improve the internal control over cash, the
company should use cash registers that lock a record of each sale and a
record of the total cash receipts for the day into the machine. The manager
can prove the amount of cash in the cash drawer against this recorded
amount.

(10-15 min.) E 8-18
1. The same person is responsible for verifying receipt of merchandise, authorizing

payment, and preparing the payment.
2. To prevent these weaknesses, the following controls should be implemented:

 Purchase orders should be used to authorize inventory purchases.
 The accountant should receive the receiving report and purchase order form
from other departments before issuing payment.
 The receipt of goods should be verified by someone other than the accountant or
the person authorizing the purchase order.
 The accountant should not place the purchase order.
(10-15 min.) E 8-19
General Journal
POST.
Feb. 28 Office Supplies 42
Freight-out 39
Inventory 112
Miscellaneous Expense 10
Postage Expense 25
Cash in Bank 230

(10-15 min.) E 8-20

General Journal
DATE POST.
Jun. 1 Petty Cash 200
Cash 200
2 Cash 4,885
Sales Revenue 4,875
10 Office Supplies 21.00

Delivery Expense 69.50
Entertainment Expense 43.50
Cash Short and Over 9.50
Cash 143.50

(10 min.) E 8-21

1. An imprest petty cash system maintains the Petty Cash account at the
prescribed balance at all times. The account balance equals the sum of
(a) cash still in the fund plus (b) petty cash tickets for payments that
have been made from the fund.
2.
General Journal
POST.
Nov. 1 Petty Cash 300
Cash 300
To open the petty cash fund.
30 Office Supplies 140

Delivery Expense 100
Cash 220
To replenish the petty cash fund.
3.
Petty Cash
Nov. 1 300
Petty Cash balance at all times ..................................................... $300

(10-15 min.) E 8-22

General Journal
POST.
a. Petty Cash 500.00
Cash in Bank 500.00
To set up the petty cash fund.
b. Delivery Expense 228.80

Supplies Expense ($60.40 + 14.72) 75.12
Miscellaneous Expense 9.52
Postage Expense 85.98
Cash 402.42
(5 min.) E 8-23
General Journal
POST.
Cash 100.00
Petty Cash 100.00
To decrease the amount of the petty cash
fund.

(15-20 min.) E 8-24
1. Determine the facts. Given in the text description.
2. Identify the ethical issues. You must decide whether it is ethical—good

or bad, moral or immoral—for a manager of a coffee shop to take meals
and not pay for them on a regular basis.
3. Specify the alternatives. Deliberately take meals and don’t pay for them.
Take meals but pay for them. Do not take meals.
4. Identify the people involved. You, your fellow employees, the manager,
Tina, and her husband, Sean, their friends, the cafe chain, and the
public.
5. Assess the possible consequences. The manager and her husband are
stealing meals and so are employees. Tina and Sean are setting a bad
example for the employees and for their friends. Word of their actions
will spread and customers will think they, too, can steal. How can
shoplifters be prosecuted if management and employees steal? The
practice also distorts the financial statements, since revenue is not
recorded for food that should have been sold.
6. Make the decision. It would be ethical and wise for the Presleys to avoid
the practice. The high road is almost always safe, and it is always best.
Was it unethical for the Presleys to help themselves? Each person must
decide for himself or herself. The class discussion should be lively.
It is interesting to contrast the Presleys with private citizens shoplifting

in the store. Both actions are stealing.
As part of determining the facts, you should investigate further whether the
manager has an arrangement with the accountant to charge a withdrawal each
month for the amount of her meals. The scenario above assumes this is not
the case.

E 8-25
Req. 1
Lee Management Consulting
Bank Reconciliation
October 31, 2016
BANK:
Bank Balance, October 31, 2016 $ 36,792
Cheque 210 190
Cheque 211 400 (590)
BOOKS:
Book Balance, October 31, 2016 $ 39,450
Add: EFT collection from Hot Houses $ 500
Interest credit 7 507
Less: EFT payment to Cheap Cheques 17
EFT payment to Internet Service 125
Bank Service charge 13 (155)
Req. 2
General Journal Entry
DATE
2016 ACCOUNTS DEBIT CREDIT
Oct. 31 Cash 500
Service Revenue 500
31 Cash 7
Interest Revenue 7
31 Supplies 17
Cash 17
31 Utilities Expense 125

Cash 125
31 Bank Service Charge Expense 13

Cash 13

(continued) E 8-25
Cash
Sep. 30 32,350 Oct. 1 4,000
Oct. 6 2,500 Oct. 14 795
Oct. 13 3,000 Oct. 14 1,415
Oct. 20 4,800 Oct. 28 190
Oct. 27 3,600 Oct. 28 400
Oct. 31 500 Oct. 31 17
Oct. 31 7 Oct. 31 125
Oct. 31 13
Bal 39,802
Service Revenue Supplies

Oct. 31 500 Oct. 31 17
Bal. 500 Bal. 17
Interest Revenue Utilities Expense

Oct. 31 7 Oct. 31 125
Bal. 7 Bal. 125
Bank Service Charge Expense

Oct. 31 13
Bal. 13
(10 min.) E 8-26

1. Outstanding cheques for August 31: $489 +$14,089 – $13,089 = $1,489
Outstanding cheques for September 30: $1,489 +$19,349 – $18,500 = $2,338
2. Outstanding deposits for August 31: $889 +$18,322 – $17,322 = $1,889
Outstanding deposits for September 30: $1,889 +$15,667 – $16,766 = $790

(30-40 min.) E 8-27
1. Beginning book balance: $9,210 + $2,140 – $2,890 = $8,460

$8,460 +$34,370 – $30,201 = $12,728
2. $9,210 + $1,105 + $23 + $27,402 – $242 – $20 – $30,212 = $7,266
3. $2,140 + $34,370 – $27,402 = $9,108
4. $2,890 + $30,102 – $30,212 =$2,780
5. $7,266 + $9,108 – $2,780 = $13,594
6. $12,728 + $1,105 + $23 – $242 – $20 = $13,594

Beyond the Numbers

(15-30 min.) BN 8-1
1. The internal control weakness in this case is a lack of separation duties.
The foreman performs too many duties.
a. The foreman hires the workers.

b. The foreman sends completed employment documents to home
office.
c. The foreman fills out workers’ time sheets and emailsall
documents to the home office.
d. The foreman passes out pay cheques to workers.
e. The workers never go to the home office, so home-office personnel
do not even know that all workers exist.
The foreman could steal from the company as follows:
a. The foreman could fill out employment documents for a fictitious

worker and fill out bogus time sheets for the fictitious employee.
Then the foreman could pocket the pay cheque written to the
employee.
b. The foreman could enter more time than actually worked by an
employee and collude with the employee to split the extra pay
received by the worker.
c. The foreman could pad his own hours to receive pay for time that
he did not work.
d. The foreman could pay friends and family members, even though
they don’t do any work.
2. The following actions will correct the internal control weakness:
a. The home office could have workers come to the office for
processing their employee documents such as tax forms. Then
home office would at least know that all workers exist.
b. Use a time clock and have employees sign their own time sheets.
c. Have a home-office employee compare signatures on the workers’
time sheets to their signatures on file and, occasionally, to their
endorsements on the backs of their pay cheques.
d. Occasionally—or always—have a home-office employee go to the
construction site to pass out pay cheques.
e. Have a home-office employee go to the construction site
occasionally to “take attendance” of workers on duty that day and
then match the names of workers on duty to their time sheets
turned in at the end of the week.

Ethical Issue
1. Samji’s lenders and the potential buyers of the Hamilton property can
be harmed by this theft. Anyone who relies on Samji’s financial
statements can be harmed by the overstated amount of cash. Samji
simply does not have as much cash as the balance sheet reports. If cash
is needed for building repairs, there may not be enough available.
2. Accounting plays a critical role of providing information to persons

who do business with Samji. A common way for a business to represent
itself to outsiders is through its financial statements. People commit
their resources based on the information reported in these statements.
To serve their intended purpose, financial statements must be complete
and accurate.

Problems
Group A
(15-20 min.) P 8-1A
TO: Nick Flewelling
FROM: Controller
SUBJECT: Advantage of Good Internal Controls
One of your key responsibilities is to control operations. Internal control
consists of the process designed and put in place by management to provide
reasonable assurance that the organization will achieve its objectives of
reliable financial reporting, effective and efficient operations, and
compliance with applicable laws and regulations. In other words it is a risk
management plan that safeguards the assets, prevents/detects error and fraud,
encourages operational efficiency, and provides accurate and reliable
information. These processes must be put in place to ensure that
management lives up to this key responsibility.
(15-20 min.) P 8-2A
Operations should be separated from accounting. Otherwise, operations

personnel can manipulate the accounting records to make their performance
look better than it really is. This can waste company assets.
Custody of assets should be separated from accounting. Otherwise, an
employee can steal an asset and cover the theft by making a bogus entry on
the books.
Authorization of transactions should be separated from custody of related
assets. Otherwise, an employee could authorize the acquisition of an asset
and have it sent to his or her home or other personal location.
Duties should be separated within the accounting department. Independent
performance of accounting duties minimizes errors and reduces the
opportunity for fraud.

(10-20 min.) P 8-3A

Req. 1 Req. 2 Req. 3
Missing Internal
Control Possible Problem Solution
a. Assignment of Lost sales due to delay of Assign programmers to
responsibilities product development product development
only. Assign company
accountants to redesign
Syspro’s accounting
system.
b. Separation of duties Theft of cash Keep accounting and

cash-handling duties
separate.
c. External Audit Unreliable financial Have an audit.

statements, lost Auditors should be able
credibility among to prevent false
investors and lenders financial statements.
Eventual bankruptcy
d. Documents (prenumbered Theft of cash, and Have receipts pre-

sales receipts) inefficiency numbered and check
numerical sequence of
logged documents.
e. Other controls (fidelity Theft of cash Purchase fidelity bonds

bonds for cashiers) on all cashiers.

Req. 1 (20-25 min.) P 8-4A

Silver Hills Estates Development
Bank Reconciliation
November 30, 2017
BANK:
Bank Balance, November 30, 2017 $29,914
Add: Deposits of November 30 in transit 2,598
32,512
Less: Outstanding cheques
Cheque 1218 400
Cheque 1228 $ 998
Cheque 1229 330
Cheque 1230 2,724 (4,452)
Adjusted bank balance, November 30, 2017 $28,060
BOOKS:
Book Balance, November 30, 2017 $26,983
Add: EFT collection of rent $ 880
Bank collection of note receivable,
including interest of $100 1,430 2,310
$29,293
Less: NSF cheque $ 433
EFT payment of insurance 275
Service charge 25
Book error––$4,968 cheque recorded as $4,468 500 (1,233)
Adjusted book balance, November 30, 2017 $28,060
Req. 2
A bank account helps control cash by providing a place for safekeeping. The bank also
provides a detailed list of River Estates’ cash transactions that River Estates managers can
compare to the company’s own cash records and, thereby, correct any book errors quickly.
The bank reconciliation helps control cash by ensuring that the company accounts for all its
cash transactions, and that the bank and book records of cash are correct. In particular, the
bank reconciliation establishes the balance of cash to report on the balance sheet.
Req. 3
Items outstanding from previous bank reconciliations that clear are ignored as they do not
need to be listed as outstanding again if they have been processed by the bank.

(30-40 min.) P 8-5A

Req. 1
Spottify Electronics
Bank Reconciliation
October 31, 2017
BANK:
Bank Balance, October 31, 2017 $9,779.40
Add: Deposit in transit 736.00
10,515.40
Cheque 244 $305.00
Cheque 278 811.90
Cheque 282 488.50
1,605.40
Bank error––deposited in error 1,196.00 (2,801.40)
Adjusted bank balance, October 31, 2017 $7,714.00
BOOKS:
Book Balance, October 31, 2017 $7,076.50*
Add: Bank collection note receivable and
interest of $96 $1,196.00
Bank collection of accounts receivable
($414.00 + $471.50) 885.50 2,081.50
$9,158.00
Less: NSF cheque $805.00
Insurance payment 529.00
Book error Cheque #280 ($3,976.90 – $3,916.90) 90.00
Bank charges 20.00 (1,444.00)
Adjusted book balance, October 31, 2017 $7,714.00
*The book balance on October 31 = ($7,714.00 adjusted bank balance + $1,444.00 – $2,081.50) =
$7,076.50.

Req. 2 (continued) P 8-5A

General Journal
DATE POST.
Oct. 31 Cash 1,196.00
Notes Receivable 1,100.00
Interest Earned 96.00
31 Cash 885.50
Accounts Receivable 885.50
31 Accounts Receivable 805.00

Cash 805.00
31 Insurance Expense 529.00

Cash 529.00
31 Purchases 90.00
Cash 90.00
31 Bank Charges Expense 20.00

Cash 20.00

(20-30 min.) P 8-6A

Req. 1 (bank reconciliation) Jazzera Distributors
Jazzera Distributors
Bank Reconciliation
October 31, 2017
BANK:
Bank Balance, October 31, 2017 $38,212
Add: Deposit of October 31 in transit $932
Correction of bank error––charged our account
for the cheque of another company 818 1,750
39,962
Cheque 312 $1,098
Cheque 522 1,086
Cheque 534 114
Cheque 539 112
Cheque 540 416
Cheque 541 894 (3,720)
BOOKS:
Book Balance, October 31, 2017 $23,072
Add: EFT––customer accounts $12,732
Bank collection of GST refund 1,766
Interest revenue earned on bank balance 160 14,658
37,730
Less: NSF cheques ($168 + $370) $ 538
Cheque for auction equipment items 818
Service charge 132 (1488)

Req. 2 (entries based on the reconciliation) (continued) P 8-6A

General Journal
DATE POST.
Oct. 31 Cash 12,732
Accounts Receivable 12,732
Electronic payments from customers.
31 Cash 1,766
GST Payable or Recoverable 1,766
GST rebate collected by bank.
31 Cash 160
Interest Revenue 160
31 Accounts Receivable 538

Cash 538
Customer cheques returned by bank.

Cash 132
Bank service charge.
31 Equipment 818
Cash 818
To record the cheque for auction items

(10-15 min.) P 8-7A

TO: Mary Briscoll
FROM: Concerned Employee
It is unwise to have the employee who opens the mail also grant sales
allowances to customers. Suppose a customer pays an invoice in full. The
mailroom employee can steal the customer cheque and grant a sales
allowance to cover the theft. If a partial payment was made, the mailroom
employee could grant a sales allowance for the remaining balance, then
pocket the cheque when the balance arrives later. To correct these internal
control weaknesses, deny the mailroom employee access to all accounting
records. Also, appoint a separate employee to grant sales allowances to
customers. This could be unlikely to occur due to the following points
however internal control should be strengthened as collusion by Sarah
Romano and somebody in the accounting department would be a problem;
Notes:
1. The mailroom employee must have access to the accounting records to
know that a customer has paid less than the full amount.
2. It may be necessary to explain to students that the mailroom employee
must forge the company endorsement on customer cheques stolen. This
person must also open—and control—a bank account in the company’s
name. This could be difficult.

(20-30 min.) P 8-8A

TO: Margaret Hamm
FROM: Accounting Student
SUBJECT: Internal Control Procedures
Comments on internal control procedures of A-1 Machines:
 Lack of separation of duties. Rather than the work of Bloom and Hurry
serving as a check on each other, the fact that both people have access to
the fund means no individual can be held responsible for it. Who would
be responsible for any shortages? A preferable method would be to
establish individual funds for each of the two employees.
 Improper documentation of expenses. Simply having a signature and a
note as to the amount and reason for payments should not be
sufficient—there is no way to validate the signature or the reason for the
expenditure. Proper procedures would be to obtain a petty cash voucher
from the individual requesting the funds indicating the date, the amount
and the reason for the expense from the person requesting the funds.
Actual receipts should be attached to the petty cash voucher or ticket
once the sales tips are completed and, if not, this should be followed up
by Bloom or Hurry.
 Improper authorization procedures and use of fund. Salespeople simply
request advances and produce receipts for costs incurred. Nothing is
done to ensure that the trips are for business purposes (as opposed to
getting to and from home). The sales manager should be required to
approve all requests for advances, and all submissions of receipts for the
actual expenses; to provide authorization that all are business expenses.
The fund really should not be used for advances for this purpose. Sales
staff should be responsible for expenses and then be reimbursed for
these costs. Petty cash is normally for unexpected small cash outlays.

Req. 1 (45-60 min.) P 8-9A

An imprest fund is money set aside for a specific purpose. An imprest fund has the same
balance at all times, which equals the cash in the fund plus the total of the tickets that
support payments from the fund. The internal control feature of an imprest fund is that it
clearly identifies the amount of money for which the fund custodian is responsible.
Req. 2
Before replenishment, the petty cash fund should hold cash of $23.50 ($400 – total
payments of $376.50).
Req. 3 (a) (creation of the petty cash fund)

General Journal
POST.
Jun. 1 Petty Cash 400.00
Cash 400.00
To create the petty cash fund.
The custodian cashes the cheque and places $400.00 in currency and coin in the fund.
(b) (replenishment of the petty cash fund)

General Journal
POST.
Jun. 30 Office Supplies Expense* 153.84
Travel Expense 60.00
Delivery Expense 29.32
Entertainment Expense 133.34
Cash 365.60
*($26.64 + $127.20)
**($400 – $34.40)
The custodian totals the petty cash tickets ($376.50) and compares the total to the amount
needed to bring the fund’s cash to the imprest balance of $400. The amount needed is
$365.60, which is $10.90 less than the sum of the tickets. Assuming this difference is
considered immaterial, the custodian cashes the $365.60 cheque and places this amount of
currency and coin in the fund, returning its cash balance to $400 ($34.40 + $365.60 =
$400.00).

(continued) P 8-9A
Req. 4 (increasing the amount of the petty cash fund)
General Journal
POST.
Jul. 1 Petty Cash 100.00
Cash 100.00
To increase the petty cash fund from $400 to
$500.
The custodian cashes the cheque and places an additional $100.00 in currency and coin in
the fund.
(15-30 min.) P 8-10A

This situation presents an ethical dilemma for Jennifer. As a CPA, Jennifer must adhere to
the rules of professional conduct of the association. Jennifer must adhere to generally
accepted accounting principles (GAAP) when recording and reporting the financial results
of the entity. Failure to do so may result in expulsion from the association, making it
impossible for her to remain a professional accountant. Jennifer should inform the president
of her disagreement with the manipulation of the results, her professional obligation not to
be a party to such manipulation, and refuse to use “creative accounting” to report a profit.

Problems
Group B
(15-20 min.) P 8-1B
TO: Mr. John Flannigan
FROM: Controller
SUBJECT: Advantages of Good Internal Controls
One of your key responsibilities is to control operations. Internal control

consists of the process designed and put in place by management to provide
reasonable assurance that the organization will achieve its objectives of
reliable financial reporting, effective and efficient operations, and
compliance with applicable laws and regulations. In other words it is a risk
management plan that safeguards the assets, prevents/detects error and fraud,
encourages operational efficiency, and provides accurate and reliable
information. These processes must be put in place to ensure that
management lives up to this key responsibility.

(15-20 min.) P 8-2B
Every business needs a system of internal controls. Internal control is the

organizational plan and all the related measures adopted by an entity to (1)
safeguard assets and records, (2) provide accurate and reliable information,
(3) promote operational efficiency, and (4) present and detect error and
fraud.
A company with an effective system of internal control needs competent,
reliable, and ethical personnel. The business may have to increase employee
pay in order to attract and retain high-quality employees, who make up the
foundation of a successful business.
It is necessary to assign responsibilities to employees so that everyone in the
organization knows his or her duties. This avoids confusion and helps to
ensure that no jobs remain undone.
The business needs a set of rules that outlines approved procedures.
Deviations from these procedures should require proper authorization to
avoid errors.
Certain duties should be separated between two or more employees to limit
the opportunity for fraud. For example, the custody of cash should be
separated from the accounting for cash.
The business may need to have an audit by an independent public
accountant. External auditors can evaluate the system of internal controls and
suggest ways to improve the business’s efficiency. Auditors also gauge the
reliability of accounting records, which provide the information for business
decisions. Internal auditors (those who work for the company) also may
perform such services.
Documents and records are needed to keep a record of sales and cash
receipts, expenses, payments, and other transactions. These records will help
you manage the business better and save money.
Electronic and other controls can safeguard assets. We need burglar alarms
to protect our buildings, and we should store real estate contracts and
property titles in fireproof vaults. We should rotate employees from job to
job. This will keep them honest.
Instructional Note: Student responses may vary considerably.

(10-20 min.) P 8-3B

Req. 1 Req. 2 Req. 3
Missing Internal
Control Characteristic Possible Problem Solution
a. Assignment of Lost sales due to delay of Assign company accountants

responsibilities product development to redesign the accounting
system. Assign programmers
to product development only.
b. Separation of duties Theft of cash Keep accounting and cash-

handling duties separate.
c. Audit Unreliable financial Have an audit to reduce the

statements and lost credibility risk of false financial
statements.
d. Documents Theft of cash and inefficiency Use prenumbered documents.
e. Other controls Theft of cash Purchase fidelity bonds for all

cashiers.
f. The bank accounts as a Theft of cash Deposit to a bank account

control device daily to use bank controls over
cash.

Req. 1 (20-25 min.) P 8-4B

Ace Hardware
Bank Reconciliation
January 31, 2017
BANK:
Bank Balance, January 31, 2017 $65,792
Add: Deposits in transit ($2,404 + $1,428) 3,832
69,624
Cheque 317 $ 1,304
Cheque 318 6,268
Cheque 319 800
Cheque 320 12,664 (21,036)
Adjusted bank balance, January 31, 2017 $48,588
BOOKS:
Book Balance, January 31, 2017 $39,478
Add: EFT collection of dividend $ 1,052
Bank collection of note receivable,
including interest of $200 12,744
Book error––$12,436 cheque recorded as $12,562 126 13,922
$53,400
Less: EFT payment of insurance $ 1,316
NSF cheque 3,456
Service charge 40 (4,812)
Adjusted book balance, January 31, 2017 $48,588
Req. 2
A bank account helps control cash by providing a place for safekeeping. The bank also
provides a detailed list of Ace’s cash transactions that Ace’s owner can compare to the
company’s own cash records and, thereby, correct any book errors quickly.
The bank reconciliation helps control cash by ensuring that the company accounts for all its
cash transactions and that the bank and book records of cash are correct. In particular, the
bank reconciliation establishes the balance of cash to report on the balance sheet.
Req. 3
If the items listed as outstanding on last month’s (December) bank reconciliation clear or
are processed on this month’s bank statement, then nothing needs to be done with these
items other than checking them off as cleared.

(30-40 min.) P 8-5B

Req. 1
Excel Communications
Bank Reconciliation
August 31, 2017
BANK:
Bank Balance, August 31, 2017 $2,470.50
Add: Deposit in transit 2,460.00
4,930.50
Cheque 461 $645.00
Cheque 502 846.00
Cheque 506 314.00
1,805.00
Bank error––deposited in error 336.50 (2,141.50)
Adjusted bank balance, August 31, 2017 $2,789.00
BOOKS:
Book Balance, August 31, 2017 $3,325.50*
Add: Bank collection of note receivable and
interest of $45.00 $585.00
Bank collection of accounts receivable
($720.00 + $471.00) 1,191.00 1,776.00
$5,101.50
Less: NSF cheque $1,792.50
Insurance payment 442.50
Book error Cheque #504 40.00
Bank charges 37.50 (2,312.50)
Adjusted book balance, August 31, 2017 $2,789.00
*The book balance on August = (2,789.00 + 2,312.50 – 1776.00) = $3,325.50

Req. 2 (continued) P 8-5B

General Journal
DATE POST.
Aug. 31 Cash 585.00
Notes Receivable 540.00
Interest Earned 45.00
31 Cash 1,191.00
Accounts Receivable 1,191.00
31 Accounts Receivable 1,792.50

Cash 1,792.50
31 Insurance Expense 442.50

Cash 442.50
31 Inventory 40.00
Cash 40.00
31 Bank Charges Expense 37.50

Cash 37.50

(20-30 min.) P 8-6B

Req. 1 (bank reconciliation) Copps Shoes
Copps Shoes
Bank Reconciliation
June 30, 2017
BANK:
Bank Balance, June 30, 2017 $50,534
Add: Deposit of June 30 in transit 3,378
53,912
Cheque 291 $306
Cheque 322 1,074
Cheque 327 4,312
Cheque 329 82
Cheque 330 3,096
Cheque 331 432
Cheque 332 1,860 11,162
Correction of bank error, which credited our account for
the deposit of another company 4,200 (15,362)
Adjusted bank balance, June 30, 2017 $38,550
BOOKS:
Book Balance, June 30, 2017 $39,518
Add: Bank collection of note receivable,
including interest revenue of $258 $11,466
Interest revenue earned on bank balance 26 11,492
$51,010
Less: Returned cheque due to unauthorized signature $3,558
NSF cheque 988
EFT (rent $5,650, utilities $2,000, cellphone $120) 7,770
Service charge 144 (12,460)
Adjusted book balance, June 30, 2017 $38,550

Req. 2 (entries based on the reconciliation) (continued) P 8-6B

General Journal
DATE POST.
Jun. 30 Cash 11,466
Note Receivable 11,208
Interest Revenue 258
Note receivable collected by bank.
30 Cash 26
Interest Revenue 26
30 Accounts Receivable—Trinity Western 3,558

Accounts Receivable—Mavis Jones 988
Cash 4,546
Customer cheques returned by bank.
30 Rent Expense 5,650

Cash 5,650
Monthly rent.
30 Utilities Expense 2,000

Cash 2,000
Monthly utilities.
30 Cellphone Expense 120

Cash 120
Monthly cellphone charge.

Cash 144
Bank service charge.

(10-15 min.) P 8-7B

TO: President John Senick
FROM: Controller
SUBJECT: Internal Control Procedures
It is unwise to have the employee who opens the mail also grant sales
allowances to customers. Suppose a customer pays an invoice in full. The
mailroom employee can steal the customer cheque and grant a sales
allowance to cover the theft. The same thing could occur if only partial
payment is received. The clerk could also delete any balance due by granting
a sales allowance, then pocket the cheque when it arrives. To correct these
internal control weaknesses, deny the mailroom employee access to all
accounting records. Also, appoint a separate employee to grant sales
allowances to customers. This could be unlikely to occur due to the
following points; however, internal control should be strengthened as
collusion by Gary Cho and somebody in the accounting department would be
a problem.
Notes:
1. Student responses may vary considerably.

2. The mailroom employee needs to have access to the accounting records
to know that a customer has paid less than the full amount.
3. It may be necessary to explain to students that the mailroom employee
must forge the company endorsement on customer cheques stolen. This
person must also open—and control—a bank account in the company’s
name. This may not be easy depending on the circumstances.

(20-30 min.) P 8-8B

TO: Jelisa Valji
FROM: Accounting Student
Comments on internal control procedures of MEI Distributors:
 Lack of separation of duties. Rather than the work of Wong and
Dekinder serving as a check on each other, the fact that both people
have access to the fund means no individual can be held responsible for
it. Who would be responsible for any shortages? A preferable method
would be to establish individual funds for each of the two employees.
 Improper documentation of expenses. Simply having a signature and a
note as to the amount and reason for payments should not be
sufficient—there is no way to validate the signature or the reason for the
expenditure. Wong and Dekinder should also be required to fill out a
petty cash ticket or voucher for each payment from the fund (signed by
the person receiving the funds and by Wong or Dekinder) to ensure all
amounts taken are authorized. Actual receipts should be attached to the
petty cash tickets/voucher once the expenses are incurred and if not, this
should be followed up on by Wong or Dekinder.
 Improper authorization procedures and use of fund. Salespeople simply
request advances and produce receipts for costs incurred. Nothing is
done to ensure that all expenses are for business purposes. The sales
manager should be required to approve all requests for advances. The
sales manager should review all expenses and provide authorization that
all are business expenses.
 The fund should not be used for this purpose. Sales staff should be
responsible for expenses and then be reimbursed for those costs once
approved by the sales manager. Petty cash is normally for unexpected
small cash outlays.

Req. 1 (45-60 min.) P 8-9B

An imprest fund is money set aside for a specific purpose. An imprest fund has the same
balance at all times, which equals the cash in the fund plus the total of the tickets that
support payments from the fund. The internal control feature of an imprest fund is that it
clearly identifies the amount of money for which the fund custodian is responsible.
Req. 2
Before replenishment, the petty cash fund should hold cash of $66.26 ($400 – total
payments of $333.74).
Req. 3. (a) (creation of the petty cash fund)

General Journal
POST.
Sep. 1 Petty Cash 400
Cash 400
To create the petty cash fund.
The custodian cashes the cheque and places $500 in currency and coin in the fund.
(b) (replenishment of the petty cash fund)

General Journal
POST.
Sep. 30 Delivery Expense 49.67
Entertainment Expense* 188.50
Office Supplies Expense** 95.57
Cash*** 338.66
To replenish the cash fund.
*($101.00 + $87.50)
**($7.50 + $88.07)
***($400.00 – $61.34)
The custodian totals the petty cash tickets ($333.74) and compares the total to the amount
needed to bring the fund’s cash to the imprest balance of $400. The amount needed is
$338.66, which is $4.92 more than the sum of the tickets. Assuming this difference is
considered immaterial, the custodian cashes the $338.66 cheque and places this amount of
currency and coin in the fund, returning its cash balance to $400 ($61.34 + $338.66 =
$400.00).

(continued) P 8-9B
Req. 4 (decreasing the amount of the petty cash fund)
General Journal
POST.
Oct. 1 Cash 100.00
Petty Cash 100.00
To decrease the petty cash fund from $400 to
$300.
(15-30 min.) P 8-10B

1. Determine the facts. Clear from the description.
2. Identify the ethical issue. Hans Bozzell’s ethical issue is whether to use
his knowledge of Orson Tool & Dye’s plans and of Sherri Fallon’s
situation to either party’s advantage (or disadvantage). Should he help
Orson buy the land at the lowest price? Should he help Fallon sell the
land at the highest price? Bozzell’s position presents him with a conflict
of interest.
3. Specify the alternatives. There are several. Here are a few: (1) Let other
members of the Orson board of directors know of Fallon’s situation in
the interest of helping Orson buy the land at a bargain price, (2) disclose
Fallon’s situation to fellow board members and insist that Orson pay
market price ($4 million) for the land, (3) advise Fallon of Orson’s
plans and encourage her to hold out for a high price on the sale of the
land, (4) reveal nothing to the Orson board or to Fallon and take no part
in the negotiation between the two parties, (5) take a temporary leave of
absence from the Orson board for unspecified “personal reasons,” (6)
declare a conflict of interest and withdraw from the decision.
4. Identify the people involved. Hans Bozzell, Orson Tool & Dye, Sherri
Fallon.

(continued) P 8-10B
5. Assess the possible consequences. Disclosing Fallon’s weakened
condition to the Orson board may help Orson buy the land at a low
price, depending on the ethical bearing of fellow board members. This
would help Orson and hurt Fallon, relative to her ability to sell the land
at market value of $4 million. Insisting that Orson offer market price for
the land would seem fair to both parties, but it would betray the trust of
Fallon. And it may or may not sway the board to go along with a $4
million offer for the land.
Making Fallon aware of Orson’s plans would help Fallon get a higher
price for the land than Bozzell believes she would get otherwise. This
would betray the trust of fellow members of the Orson board.
Remaining silent would preserve Bozzell’s integrity. However, if
either Orson or Fallon ever learned of Bozzell’s relationship with the
other party, they would wonder whether he had used the information
against them.
Taking a temporary leave of absence or declaring the conflict of
interest and withdrawing from the decision would preserve Bozzell’s
integrity and remove him from the conflict of interest. It would also
preserve his reputation for fairness and the reputation of the Western
Bank for keeping customer information confidential.
6. Make the decision. The authors would suggest that Bozzell declare the
conflict of interest and withdraw from the decision. This way neither
Orson nor Sherri Fallon can accuse Hans Bozzell of using his
priviledged information to the advantage of the other party.

Challenge Problems
(10-15 min.) P 8-1C

If top management understands the importance of and is committed to an
effective system of internal control, then they will make the resources
available to establish and maintain such a system. In addition they will lend
their support to those charged with making the system work.
On the other hand, if top management is not convinced or committed, they
will not provide the needed formal support, and employees, perceiving that
management doesn’t think internal control is important, will abuse the
system.
(10-15 min.) P 8-2C

The common thread is that they all involve separation of duties between
authorization of transactions, recording of transactions, and custody of
assets. In each case, one person is checking the work of another to ensure
accuracy and honesty.
Separation of duties is a very important aspect of internal control.

Decision Problems
(20-30 min.) Decision Problem 1

Stratford Tech Solutions
Stratford Tech Solutions
Bank Reconciliation
April 30, 2017
BANK:
Bank Balance, April 30, 2017 $8,600
Add: Deposit of April 30 in transit 6,000
14,600
Cheque 402 $ 200
Cheque 527 600
Cheque 531 1,200
Cheque 561 400 (2,400)
Adjusted bank balance, April 30, 2017 $12,200
BOOKS:
Book Balance, April 30, 2017 $12,900
Add: Bank collection 400
13,300
Less: Service charge $20
NSF cheque 80 100
Adjusted book balance, April 30, 2008 $13,200
Based on the above reconciliation, it appears Cindy Bing, the cashier, has stolen $1,000, the
difference between the adjusted bank and book balances ($13,200 – $12,200).
Gupda should assign another employee with no cash-handling duties to prepare the bank
reconciliation. The cashier should not perform this duty because, as this case demonstrates,
a person who handles cash and also prepares the reconciliation can steal cash and
manipulate the reconciliation to cover the theft. Perhaps Gupda should prepare the
reconciliation herself or at least review it every month.

Financial Statement Cases
(20-30 min.) Financial Statement Case 1
All amounts are in thousands of U.S. dollars.
Req. 1
Ernst and Young LLP Chartered Accountants are the external auditing firm
and the date of the annual report is March 29, 2014. The president is Heather
Reisman (Indigo).
Req. 2
Indigo’s management—not the outside auditors—bears primary
responsibility for the financial statements. Two signatures appear at the
bottom of the report titled Management’s Responsibility for Financial
Reporting, Heather Reisman and the controller, Kay Brekkan, CFO.
Req. 3
Paragraph 2 of the Management’s Responsibility for Financial Reporting
document in the 2014 annual report outlines managements responsibility for
internal controls.
Req. 4
The auditors used Canadian generally accepted auditing standards (GAAS)
and International Financial Reporting Standards (IFRS).
Req. 5
Cash equivalents are items that are easily converted into cash such as term
deposits, GIC’s, money market funds, etc.
Req. 6
Cash decreased by $52,984,000 during fiscal 2014—from ($210,562,000) in
2013 to ($157,578,000) in 2014.

(20-30 min.) Financial Statement Case 2
Req. 1
TELUS’s outside auditing firm is Deloitte LLP. The Vancouver, B.C. office
signed the Independent Auditor’s Report on February 26, 2014, 57 days after
TELUS’s year ended on December 31, 2013. This date of the audit report
indicates the date on which the audit was substantially completed by the
auditors.
Req. 2
The management of TELUS Corporation bears responsibility for the

financial statements. The Report of the Independent Registered Public
Accounting firm states this fact.
Req. 3
No, the auditor does not guarantee that internal controls are effective. In
making risk assessments during the audit, the auditor considers internal
control relevant to TELUS’s preparation and fair presentation of the financial
statements.
Req. 4
The audit was conducted in accordance with Generally Accepted Auditing

Standards and the Public Company Accounting Oversight Board (US).
Statements must be compliant with International Financial Reporting
Standards as issued by the International Accounting Standards Board.
Req. 5
Cash increased from $ 107 million to $ 336 million during 2013, an increase
of $229 million.

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Chapter 8

Internal Control and Cash

Copyright © 2017 Pearson Canada Inc.

6. Business documents and records provide the details of business

8-640 Copyright © 2017 Pearson Canada Inc.

Copyright © 2017 Pearson Canada Inc. 8-641

8-642 Copyright © 2017 Pearson Canada Inc.

(5-10 min.) S 8-3

Copyright © 2017 Pearson Canada Inc. 8-643

Outstanding cheques at the end of July: $4,520 – $3,760 = $760

Outstanding cheques at the end of August: ($6,340 + $760) – $2,580 = $4,520

8-644 Copyright © 2017 Pearson Canada Inc.

(10 min.) S 8-7

31 Bank Charges Expense 40

Copyright © 2017 Pearson Canada Inc. 8-645

1. There is a weakness in internal control over cash receipts.

2. To prevent these weaknesses, the following controls should be implemented:

(5-10 min.) S 8-11

8-646 Copyright © 2017 Pearson Canada Inc.

(10 min.) S 8-13

30 Office Supplies 117

Copyright © 2017 Pearson Canada Inc. 8-647

(10 min.) E 8-1

(10 min.) E 8-2

(10 min.) E 8-3

8-648 Copyright © 2017 Pearson Canada Inc.

(10-15 min.) E 8-4

a. Weakness. The control environment will not be as effective as it would

(10-15 min.) E 8-5

Copyright © 2017 Pearson Canada Inc. 8-649

(5-10 min.) E 8-6

8-650 Copyright © 2017 Pearson Canada Inc.

Copyright © 2017 Pearson Canada Inc. 8-651

(10–20 min.) E 8-9

Balance, January 1, 2017 $ 0

8-652 Copyright © 2017 Pearson Canada Inc.

(10–20 min.) E 8-10

Copyright © 2017 Pearson Canada Inc. 8-653

(10-20 min.) E 8-11

Less: Correction of book error––Recorded $316 cheque

Bobbie Brown has cash of $17,356 on July 31, 2017.

8-654 Copyright © 2017 Pearson Canada Inc.

(10-20 min.) E 8-12

Copyright © 2017 Pearson Canada Inc. 8-655

(10-15 min.) E 8-13

31 Bank Charges Expense ($120 + $200) 320

31 Accounts Receivable 2,760

31 Salary Expense ($880 – $288) 592

(5-15 min.) E 8-14

8-656 Copyright © 2017 Pearson Canada Inc.

(5-15 min.) E 8-15

Book ? Bank Balance $36,938

Note collected 2,500 No o/s deposits —

Interest earned 500

Service charges 80 Deduct o/s cheques 6,450

Reconciled Balance *$30,488 $30,488

*assumed that this amount is the same as bank side.

To solve book beginning balance: $30,488 + $80 – $500 – $2,500 =

We should have according to our calculations $27,568 showing in our

Copyright © 2017 Pearson Canada Inc. 8-657

(5-15 min.) E 8-16

Book $27,568 Bank Balance $35,938

Note collected 2,500 No o/s deposits —