Chapter Sarbanes-Oxley, Internal Control, and Cash Student: _ The Sarbanes-Oxley Act of 2002 was passed by Congress due to the public outcry after the financial scandals of the early 2000s True False Sarbanes-Oxley’s purpose is to improve financial reporting True False There are two internal control objectives and they are to ensure accurate financial reports, and ensure compliance with applicable laws True False Sarbanes-Oxley requires companies to maintain strong and effective internal controls and thus prevent fraud and misleading financial statements True False The Sarbanes-Oxley Act requires that financial statements of all public companies report on management's conclusions about the effectiveness of the company's internal control procedures True False The control environment in an internal control structure is the attitude and awareness of internal control by all employees True False Separating the responsibilities for purchasing, receiving, and paying for equipment is an example of the control procedure: separating operations, custody of assets, and accounting True False Internal control is enhanced by separating the control of a transaction from the record-keeping function True False A backlog in recording transactions is an example of a warning sign from the accounting system True False 10 Money orders are considered cash True False 11 A customer's check received in settlement of an account receivable is considered cash True False 12 Businesses who have several bank accounts, petty cash, and cash on hand, would maintain a separate ledger account for each type of cash True False 13 For strong internal control system over cash, it is important to have the duties related to cash receipts and cash payments divided among different employees True False 14 When a clerk enters a sale and the customer can see the amount displayed and is given a cash receipt, this is an example of a preventive control True False 15 If the balance in Cash Short and Over at the end of a period is a credit, it indicates that cash shortages have exceeded cash overages for the period True False 16 If the balance in Cash Short and Over at the end of a period is a credit, it should be reported as an "other income" item on the income statement True False 17 An example of good internal controls over cash payments is the taking of all cash discounts offered True False 18 A voucher is a form on which is recorded pertinent data about a liability and the particulars of its payment True False 19 When the voucher system is used, the amount due on each voucher represents the credit balance of an account payable if the voucher is in full payment to a creditor True False 20 A voucher system is an example of an internal control procedure over cash payments True False 21 A voucher is a written authorization to make a cash payment True False 22 A payment system that uses computerized electronic impulses to effect a cash transaction is called electronic funds transfer (EFT) True False 23 A remittance advice is the notification accompanying the check issued to a creditor that states the specific invoice being paid True False 24 The bank often informs the company of bank service charges by including a credit memo with the monthly bank statement True False 25 Bank customers are considered creditors of the bank so the bank shows their accounts with credit balances on the bank's records True False 26 Depositing all cash, checks, etc in a bank and paying with checks is an internal control procedure over cash True False 27 For efficiency of operations and better control over cash, a company should maintain only one bank account True False 28 In preparing a bank reconciliation, the amount of deposits in transit is deducted from the balance per bank statement True False 29 In preparing a bank reconciliation, the amount of outstanding checks is added to the balance per bank statement True False 30 In preparing a bank reconciliation, the amount indicated by a debit memo for bank service charges is added to the balance per company's records True False 31 In preparing a bank reconciliation, the amount of a canceled check omitted from the journal is added to the balance per company's records True False 32 A check for $342 was erroneously charged by the bank as $432 In order for the bank reconciliation to balance, you must add $90 to the bank statement balance True False 33 If an adjustment for an NSF check is made in a company’s bank reconciliation, then the company must have written a bad check during the month True False 34 The amount of the "adjusted balance" appearing on the bank reconciliation as of a given date is the amount that is shown on the balance sheet for that date True False 35 All bank memos reported on the bank reconciliation require entries in the company's accounts True False 36 The bank reconciliation is an important part of the system of internal controls True False 37 The main reason that the bank statement cash balance and the company's cash balance not initially balance is due to timing differences True False 38 The bank reconciles its statement to the company's records True False 39 In preparing a bank reconciliation, the amount indicated by a credit memo for a note receivable collected by the bank is added to the balance per company's records True False 40 In preparing a bank reconciliation, the amount of an error indicating the recording of a check in the journal for an amount larger than the amount of the check is added to the balance per company's records True False 41 A check outstanding for two consecutive months will appear only on the first month's bank reconciliation True False 42 After a bank reconciliation is completed, adjusting entries are prepared for items in the balance per company's records as well as items in the balance per bank statement True False 43 A business that requires all cash payments be made by check can not use a petty cash system True False 44 In establishing a petty cash fund, a check is written for the amount of the fund and is recorded as a debit to Accounts Payable and a credit to Petty Cash True False 45 Expenditures from a petty cash fund are documented by a petty cash receipt True False 46 The sum of the money on hand and petty cash receipts in a petty cash fund will always be equal to the balance in the Petty Cash account True False 47 When the petty cash fund is replenished, the petty cash account is credited for the total of all expenditures made since the fund was last replenished True False 48 Most companies who have several bank accounts, petty cash, and cash on hand, would list each separately on the balance sheet True False 49 A petty cash fund is used to pay relatively large amounts True False 50 The petty cash fund eliminates the need for a bank checking account True False 51 A compensating balance occurs when a bank may require a company to maintain a maximum cash balance True False 52 Cash equivalents are short -term investments that will be converted to cash within 120 days True False 53 Money market accounts, commercial paper, and United States Treasury Notes are examples of cash equivalents True False 54 The doomsday ratio includes both cash and cash equivalents in the numerator True False 55 Which one of the following below is not an element of internal control? A risk assessment B monitoring C information and communication D cost-benefit considerations 56 Which one of the following below is not a factor that influences a business's control environment? A management's philosophy and operating style B organizational structure C proofs and security measurers D personnel policies 57 When a firm uses internal auditors, it is adhering to which one of the following internal control elements? A risk assessment B monitoring C proofs and security measures D separating responsibilities for related operations 58 The objectives of internal control are to A control the internal organization of the accounting department personnel and equipment B provide reasonable assurance that operations are managed to achieve goals, financial reports are accurate, and laws and regulations are complied with C prevent fraud, and promote the social interest of the company D provide control over "internal-use only" reports and employee internal conduct 59 Which one of the following below reflects a weak internal control system? A all employees are well supervised B a single employee is responsible for comparing a receiving report to an invoice C all employees must take their vacations D a single employee is responsible for collecting and recording of cash 60 Internal control does not consist of policies and procedures that A protect assets from misuse B aid management in directing operations toward achieving business goals C guarantee the company will not go bankrupt D ensure that business information is accurate 61 A firm's internal control environment is not influenced by A management's operating style B organizational structure C personnel policies D monitoring policies 62 An element of internal control is A risk assessment B journals C subsidiary ledgers D controlling accounts 63 A necessary element of internal control is A database B systems design C systems analysis D information and communication 64 In management's internal control report that is now required of all public companies, which of the following does not have a direct effect on a company's internal control system? A internal auditors B independent accountants C Board of Director's audit committee D Board of Trustees 65 Which of the following should not be considered cash by an accountant? A money orders B bank checking accounts C postage stamps D travelers' checks 66 The cash account in the company's ledger is a(n) A asset with a debit balance B asset with a credit balance C liability with a debit balance D liability with a credit balance 67 The notification accompanying a check that indicates the specific invoice being paid is called a A remittance advice B voucher C debit memo D credit memo 68 The debit balance in Cash Short and Over at the end of an accounting period is reported as A an expense on the income statement B income on the income statement C an asset on the balance sheet D a liability on the balance sheet 69 An example of a preventive control is A a single person handles the responsibilities for operations, custody of assets, and accounting B separation of the Purchasing Department and Accounting Department personnel C bonding employees who handle cash D accepting payment in currency only 70 Procedures designed to protect cash from theft and misuse from the time it is received until it can be deposited in a bank are called A accounting controls B cash controls C preventive controls D detective controls 71 A special form on which is recorded pertinent data about a liability and the particulars of its payment is called a(n) A invoice B voucher C debit memo D remittance advice 72 EFT A means Efficient Funds Transfer B can process certain cash transactions at less cost than by using the mail C makes it easier to document purchase and sale transactions D means Effective Funds Transfer 73 A voucher A is received from customers to explain the purpose of a payment B is normally prepared in the Accounting Department C system is used to control cash receipts D system is an internal control procedure to verify that the assets in the ledger are the ones the company owns 74 A voucher is usually supported by A a supplier's invoice B a purchase order C a receiving report D all of the above 75 The reconciliation of the cash register tape with the cash in the register is an example of A other controls B independent internal verification C establishment of responsibility D segregation of duties 76 Which of the following is not an internal control activity for cash? A The number of persons who have access to cash should be limited B All cash receipts should be recorded promptly C The functions of record keeping and maintaining custody of cash should be combined D Surprise audits of cash on hand should be made occasionally Journal Post Ref Date Description Debit Credit Description Petty Cash Cash Debit 300 Credit Office Supplies Selling Expenses Cash Short and Over Cash 137 112 Journal Post Ref Date Mar Mar 31 300 13 236 159 On April 2nd, Granger Sales decides to establish a $125.00 Petty Cash Account to relieve the burden on Accounting (a) Journalize this event (b) On April 10th, the petty cash fund has receipts for mail and postage of $43.50, contributions and donations of $29.50, meals and entertainment of $38.25 and $13.55 in cash Journalize the replenishment of the fund (c) On April 11th, Granger Sales decides to increase petty cash to $200.00 Journalize this event (a) Apr (b) Apr 10 (c) Apr 11 Petty Cash Cash 125.00 Mail and Postage Expense Contributions and Donations Expense Meals and Entertainment Expense Cash Short and Over Cash 43.50 29.50 38.25 0.20 Petty Cash Cash 75.00 125.00 111.45 75.00 160 The last custodian of the petty cash fund was hospitalized and you have been asked to take stock of the fund and replenish it When you receive the fund, it has $299 in cash and receipts as follows: Office supplies Advertising Transportation by Taxi $295 120 75 The petty cash fund was established to have $800 in it Based on what you have found, what journal entry should be recorded to replenish the fund? Office Supplies Advertising Expense Transportation Expense Cash Short and Over Cash 295 120 75 11 501 161 Journalize the entries to record the following: Jun Established a petty cash fund of $200 Jun 30 The amount of cash in the petty cash fund is now $57 The fund is replenished based on the following receipts: postage, $25; entertainment $100; miscellaneous $20 Record any discrepancy in the cash short and over account Journal Date Description Post Ref Debit Credit Description Petty Cash Cash Postage Expense Entertainment Adm Expense Miscellaneous Expense Cash Short and Over Cash Post Ref Debit 200 Credit Journal Date Jun Jun 30 200 25 100 20 143 162 Journalize the entries to record the following: Sept Established a petty cash fund of $350 Sept 30 The amount of cash in the petty cash fund is now $130 The fund is replenished based on the following receipts: office supplies, $116; postage $100 Record any discrepancy in the cash short and over account Journal Date Description Post Ref Debit Credit Description Petty Cash Cash Post Ref Debit 350 Credit Journal Date Sept Sept 30 Office Supplies Expense Postage Expense Cash Short & Over Cash 350 116 100 163 (a) (b) Where are cash equivalents disclosed in the financial statements? List three examples of cash equivalents (a) (b) Cash account on the balance sheet Money market funds; notes of major corporations (commercial paper); United States Treasury Bills 220 164 You began your new job as the accountant for Morton Company You were surprised to find that the company had a $2,000 petty cash fund, which sits in the break room The President of the company told you: “Our petty cash system here works quite smoothly Since everyone is honest here, everyone has access to the fund for incidentals that might pop up in the course of the business day Most of these situations don’t have any receipts tied to them, so I just put the money back in the fund when my secretary tells me that we have run out and debit the amount to Miscellaneous Expense.” Required: (a) Should you implement some controls on petty cash? Why? (b) If so, what controls could be used for petty cash? a b Even though the President thinks the petty cash system works well, $2,000 is a tempting sum for theft Even with only $2,000, if the fund is replenished frequently, a significant amount of cash could be stolen For example, if the fund is replenished weekly, then $104,000 ($2,000 ´ 52 weeks) could be subject to theft The issue of debiting the amount used to Miscellaneous Expense is a questionable practice that would typically be flagged by the independent auditor Controls for petty cash include (1) designating one person who is responsible for the fund, (2) maintaining a written record of all payments, (3) requiring support (receipts) for payments from the fund, and (4) periodic review of the funds on hand and the payments by an independent person 165 Why would a bank require a company to maintain a compensating balance? Usually a compensating balance is part of a loan agreement or line of credit 166 Farm Store, Inc reported the following data in its December 31, 2011 annual report Cash and cash equivalents Negative cash flows from operations $1,050,000 (420,000) Required: (1) What is the company’s “cash burn” per month? (2) What is the company’s ratio of cash to monthly cash expenses? (3) Interpret the ratio you computed in part What are the implications for Farm Store, Inc (1) $420,000 / 12 = $35,000 per month (2) $1,050,000 / 35,000 = 30 (3) The ratio computed in part means that as of December 31, 2011, Farm Store, Inc.would run out of cash in 1/2 years unless it changes its operations, sells investments, or raises additional financing 167 Peaches, Inc reported the following data in it’s December 31, 2011 annual report: Cash and cash equivalents Cash flow from operations $460,000 (240,000) Required: (1) What is the company’s “cash burn” per month? (2) What is the company’s ratio of cash to monthly cash expenses? (1) $240,000/12=$20,000 per month (2) $460,000/$20,000=23 months 168 The following data is from the Miser Company for years ended 2008-2011 Cash & Cash Equivalents Cash Flow from Operations Year Ending December 31 Data 2008 23,788 (32,556) 2009 45,776 (47,880) 2010 52,899 (32,357) 2011 82,744 (16,450) Calculate the following: Year Ending December 31 Data 2008 2009 2010 2011 Monthly Cash Expenses Ratio of Cash to Monthly Cash Expenses Monthly Cash Expenses Ratio of Cash to Monthly Cash Expenses Year Ending December 31 Data 2008 2,713 8.8 2009 3,990 11.5 2010 2,696 19.6 2011 1,371 60.4 169 The following data were gathered to use in reconciling the bank account of Savannah Company: Balance per bank Balance per company records Bank service charges Deposit in transit NSF check Outstanding checks $16,750 16,125 80 2,195 950 3,850 What is the adjusted balance on the bank reconcilition? $15,095 ($16,750 + $2,195 - $3,850) or ($16,125 -$80 - $950) 170 Match the following elements of internal control: Control Procedures Monitoring Control Environment Information and Communication Risk Assessment overall attitude of management and employees identify, analyze and assess likeliness of vulnerabilities provides reasonable assurance that business goals will be achieved used to locate weaknesses and improve controls used by management for guiding operations and ensuring compliance with requirements 171 List and define each of the five elements of internal control (1) (2) (3) (4) (5) Control Environment The control environment is the overall attitude of management and employees about the importance of internal controls Risk assessment Risk assessment is the identification of risks faced by an organization so that management can take necessary actions to control them Control Procedures The control procedures are the policies and procedures designed to provide reasonable assurance that the business goals are met and fraud is prevented Monitoring Monitoring locates deficiencies in the internal control system and improves control effectiveness Information and Communication Information and communication to management about the control environment, risk assessment, control procedures, and monitoring elements of internal control are needed by management to guide operations and ensure compliance with reporting, legal, and regulatory requirements 172 Two features of internal control are presented in the following sections Each is followed by a list of four irregularities that occurred in processing data Identify the one irregularity from each list that would be discovered or prevented by the feature of internal control described (a) The sum of the balances of the accounts in the customer s ledger is compare d at the end of each month with the balance of the accounts receivabl e account in the general ledger by a person who has no responsi bility for maintain ing either the general ledger or the customer s ledger (1) (2) (3) (4) Five hours of services were rendered but the customer was only billed for four hours A cash receipt of $750 was recorded correctly in the accounts receivable controlling account but was posted to the customers ledger as $75 A bill for services rendered to Cole Co was erroneously posted to the account of Coleman Co in the customers ledger No entry was made in the accounting records for services rendered to a customer (b) Both cash and credit charges for services rendered are recorded on prenumb ered invoices At the end of the day, all invoices are accounte d for before the duplicate copies of the invoices are routed to the accounti ng departme nt for entry into the accounts and the cash is sent to the cashier's departme nt for deposit (1) (2) (3) (4) (a) (b) (2) (3) Some charge customers complained that the monthly statements of account did not add all amounts correctly Some clerks used incorrect hourly rates in preparing invoices Some clerks destroyed duplicate copies of cash invoices and misappropriated the cash Some charge customers complained that the monthly statement of account did not indicate credits for payments made 173 The Scharf Company is a retailer located in a state without sales tax The following data was given to you to complete the transactions for the day’s sales to be recorded All cash drawers start with $100 in change Cash in Drawer Sales Reading Difference Reg #1 974.50 879.50 Reg #2 1,383.66 1,298.16 Reg #3 939.46 839.46 Reg.#4 1,137.91 1,030.33 Record the Journal Entries for EACH cash register to determine the cashier’s accuracy Account Debit Credit First item for the student to remember is that EACH cash drawer starts with $100 This must be subtracted from the total cash in drawer to determine the cash over/short amount Reg # Journal Entries: Account Cash Cash Short and Over Sales Debit 874.50 5.00 Credit 879.50 Cash Cash Short and Over Sales 1,283.66 14.50 Cash Sales 839.46 Cash Cash Short and Over Sales 1,037.91 1,298.16 839.46 7.58 1,030.33 174 Roper Electronics received its bank statement for the month of August with an ending balance of $11,740.00 Roper determined that check #613 for $155.00 and check #601 for $420.00 were both outstanding Also, a $6,900.00 deposit for August 30th was in transit as of the end of the month Northern Regional Bank also collected a $5,000.00 notes receivable on August 1st that was issued March 1st at 12% annual interest No interest revenue has been accrued on this note and Northern Regional Bank charged a $35.00 fee for the collection service.The bank statement reveals a bank service charge of $20.00 A customer check for $68.00 was returned with the bank statement marked “NSF” The ending balance of the Roper cash account is $12,938.00 Complete a bank/account reconciliation and prepare any necessary journal entries for the reconciliation Bank balance August 31: Add deposits in transit Less outstanding checks $11,740.00 6,900.00 155.00 420.00 Adjusted balance - bank: Company balance August 31: Add N/R Interest Revenue Less collection fee Less bank service charge Less NSF check Adjusted balance - company Aug 31 Aug 31 Aug 31 (575.00) $18,065.00 $12,938.00 5,000.00 250.00 (35.00) 5,215.00 (20.00) (68.00) $18,065.00 Cash Bank Service Charge Expense Notes Receivable Interest Revenue 5,215.00 35.00 Bank Service Charge Expense Cash 20.00 Accounts Receivable Cash 68.00 5,000.00 250.00 20.00 68.00 175 Green Valley Bank sent Comstock Industries their end of month bank statement for July The end of month balance by the bank is $11,237.00 The statement shows that a deposit for $4,250.00 is in transit at the end of the statement period The statement also revealed that checks for $87.00, $105.00, and $95.00 are outstanding Green Valley collected a 90 day, 12% interest $4,000.00 note receivable charging $20.00 for the service No interest has been accrued on the note The bank charges a monthly account fee of $35.00 The end of month balance per company books is $11,135.00 Complete a bank/account reconciliation and write any necessary journal entries for the reconciliation Bank balance July 31: Add deposits in transit Less outstanding checks 11,237.00 4,250.00 87.00 105.00 95.00 Adjusted balance - bank: Company balance July 31: Add N/R Interest Revenue Less collection fee Less bank service charge 4,000.00 120.00 (20.00) Adjusted balance - company 15,200.00 Jul 31 Jul 31 (287.00) 15,200.00 11,135.00 4,100.00 (35.00) Cash Bank Service Charge Expense Notes Receivable Interest Revenue 4,100.00 20.00 Bank Service Charge Expense Cash 35.00 4,000.00 120.00 35.00 176 The cash account for Santiago Co on May 31, 2014 indicated a balance of $20,915 The March bank statement indicated an ending balance of $25,645 Comparing the bank statement, the canceled checks, and the accompanying memos with the records revealed the following reconciling items: a b c d e f Checks outstanding totaled $5,975 A deposit of $3,796 had been made too late to appear on the bank statement A check for $1,482 returned with the statement had been incorrectly recorded as $482 The check was originally issued to pay on account The bank collected $4,515 on a note left for collection Bank service charges for May amounted to $70 A check for $894 was returned by the bank because of insufficient funds Prepare a bank reconciliation as of May 31, 2014 Journalize the necessary entries Santiago Co Bank Reconciliation May 31, 2014 Journal Post Ref Date Description Debit Credit Santiago Co Bank Reconciliation May 31, 2014 Cash balance according to bank statement Add: Deposits not recorded by bank $25,645 3,796 29,441 5,975 $23,466 Deduct: Outstanding Checks Adjusted balance Cash balance according to company’s records Add: Proceeds of note collected by bank Deduct: Error in recording check Bank service charges Nonsufficient funds check Adjusted balance $20,915 4,515 25,430 $1,000 70 894 1,964 $23,466 Journal Post Ref Date May 31 Description Cash Note Receivable Debit 4,515 Accounts Payable Bank Service Charge Expense Accounts Receivable Cash 1,000 70 894 Credit 4,515 1,964 177 On April 3rd, Snappy Sales decides to establish a $135.00 Petty Cash Account to relieve the burden on Accounting (a) Journalize this event (b) On April 11th, the petty cash fund has receipts for mail and postage of $32.75, contributions and donations of $25.25, meals and entertainment of $68.00 and $9.75 in cash Journalize the replenishment of the fund (c) On April 12th, Snappy Sales decides to increase petty cash to $175.00 Journalize this event (a) Apr (b) Apr 11 (c) Apr 12 Petty Cash Cash 135.00 Mail and Postage Expense Contributions and Donations Expense Meals and Entertainment Expense Cash Short and Over Cash 32.75 25.25 68.00 Petty Cash Cash 135.00 0.75 125.25 40.00 40.00 178 Present entries to record the following transactions: (a) (b) (c) Established a petty cash fund of $235.00 The petty cash fund now has a balance of $42.80 Replenished the fund, based on the following disbursements as indicated by a summary of the petty cash receipts: office supplies, $74.50; miscellaneous administrative expense, $92.75; and miscellaneous selling expense, $18.60 Increased the petty cash fund to $300.00 (a) Petty Cash Cash 235.00 235.00 (b) Office Supplies Miscellaneous Administrative Expense Miscellaneous Selling Expense Cash Short and Over Cash 74.50 92.75 18.60 6.35 (c) Petty Cash Cash 65.00 192.20 65.00 179 On August 3rd, Sonar Sales decides to establish a $275.00 Petty Cash Account to relieve the burden on Accounting (a) Journalize this event (b) On August 11th, the petty cash fund has receipts for mail and postage of $124.75, contributions and donations of $53.25, meals and entertainment of $63.85 and $32.75 in cash Journalize the replenishment of the fund (c) On August 12th, Sonar Sales decides to increase petty cash to $400.00 Journalize this event (a) Aug (b) Aug 11 (c) Aug 12 Petty Cash Cash 275.00 Mail and Postage Expense Contributions and Donations Expense Meals and Entertainment Expense Cash Short and Over Cash 124.75 53.25 63.85 0.40 Petty Cash Cash 275.00 242.25 125.00 125.00 180 Groceries R Us, Inc reported the following date in it’s December 31, 2011 annual report Cash and cash equivalents Cash flow from operations $2,280,000 (240,000) (1) What is the company’s “cash burn” per month? (2) What is the company’s ratio of cash to monthly cash expenses? (3) Interpret the ratio you computed in part What are the implications for Groceries R Us, Inc.? 1) $240,000/12 = $20,000 per month 2) $2,280,000/$20,000 = 114 months 3) The ratio computed in part mean that as of December 31, 2011, Groceries R Us, Inc would run out of cash in and a half years ... days of cash receipts from sales (a) (b) Actual cash in cash register, $4,512.36; cash receipts per cash register tally, $4,413.07 Actual cash in cash register, $3,812.95; cash receipts per cash. .. Cash Short and Over for $4.25 123 A $140 petty cash fund has cash of $20 and receipts of $117 The journal entry to replenish the account would include a credit to A Cash for $20 B Cash Over and. .. converted to cash within two years C will be converted to cash within 90 days D will be converted to cash within 120 days 126 A minimum cash balance required by a bank is called A cash in bank B cash