Accounting Assignment 8.1 Handout (2015)

Assignment 8.1 Handout
1. Internal controls are designed to safeguard assets, encourage employees to follow company
policies, promote operational efficiency, and ensure accurate accounting records.
Requirements
R1. Which objective is most important?
R2. Which must the internal controls accomplish for the business to survive? Give your reason.
2. The Sarbanes-Oxley Act affects public companies.
Requirement
R1. How does the Sarbanes-Oxley Act relate to internal controls? Be specific.
3. Separation of duties is a key internal control.
Requirement
R1. Explain in your own words why separation of duties is often described as the cornerstone of
internal control for safeguarding assets. Describe what can happen if the same person has
custody of an asset and also accounts for the asset.
4. There are 5 characteristics identified in the chapter as pitfalls of e-commerce.
Requirement
R1. List the 5 characteristics identified in the chapter as pitfalls of e-commerce.
5. Answer the following questions about the controls in bank accounts:
Requirements
R1. Which bank control protects against forgery?
R2. Which bank control reports what the bank did with the customer’s cash each period?
R3. Which bank control confirms the amount of money put into the bank?
6. The Cash account of Safe and Secure Security Systems reported a balance of $2,490 at May
31, 2011. There were outstanding checks totaling $500 and a May 31 deposit in transit of $300.
The bank statement, which came from Tri Cities Bank, listed the May 31 balance of $3,360.
Included in the bank balance was a collection of $680 on account from Ryan Saar, a Safe and
Secure customer who pays the bank directly. The bank statement also shows a $20 service
charge and $10 of interest revenue that Safe and Secure earned on its bank balance.
Requirement
R1. Prepare Safe and Secure’s bank reconciliation at May 31.
7. Review your results from preparing Safe and Secure Security Systems’ bank reconciliation in
problem #6.
Requirement
R1. Journalize the company’s transactions that arise from the bank reconciliation. Include an
explanation with each entry.

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8. Diedre Chevis sells furniture for DuBois Furniture Company. Chevis is having financial
problems and takes $500 that she received from a customer. She rang up the sale through the
cash register.
Requirement
R1. What will alert Betsy DuBois, the controller, that something is wrong?
9. Review the internal controls over cash receipts by mail presented in the chapter.
Requirement
R1. Exactly what is accomplished by the final step in the process, performed by the controller?
10. A purchasing agent for Westgate Wireless receives the goods that he purchases and also
approves payment for the goods.
Requirements
R1. How could this purchasing agent cheat his company?
R2. How could Westgate avoid this internal control weakness?
11. The following petty cash transactions of Lexite Laminated Surfaces occurred in August:

Requirement
R1. Prepare journal entries without explanations.
12. Gwen O’Malley, an accountant for Ireland Limited, discovers that her supervisor, Blarney
Stone, made several errors last year. Overall, the errors overstated the company’s net income by
20%. It is not clear whether the errors were deliberate or accidental.
Requirement
R1. What should O’Malley do?
13. The following items could appear on a bank reconciliation:

Requirement
R1. Classify each item as (1) an addition to the book balance, (2) a subtraction from the book
balance, (3) an addition to the bank balance, or (4) a subtraction from the bank balance.

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14. Louise’s Dance Studio created a $200 imprest petty cash fund. During the month, the fund
custodian authorized and signed petty cash tickets as follows:

Requirement
R1. Make the general journal entries to a. create the petty cash fund and b. record its
replenishment. Cash in the fund totals $15, so $10 is missing. Include explanations.
15. Each of the following situations has an internal control weakness.

Requirements
R1. Identify the missing internal control characteristics in each situation.
R2. Identify the possible problem caused by each control weakness.
R3. Propose a solution to each internal control problem.
16. The April cash records of Donald Insurance follow:

Donald Insurance’s Cash account shows a balance of $17,040 at April 30. On April 30, Donald
Insurance received the following bank statement:

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Additional data for the bank reconciliation:

Requirements
R1. Prepare the bank reconciliation of Donald Insurance at April 30, 2011.
R2. Journalize any required entries from the bank reconciliation.
17. On November 1, Fab Salad Dressings creates a petty cash fund with an imprest balance of
$400. During November, Sunny Lewis, the fund custodian, signs the following petty cash tickets:

On November 30, prior to replenishment, the fund contains these tickets plus cash of $245. The
accounts affected by petty cash payments are Office supplies expense, Travel expense, Delivery
expense, Entertainment expense, and Inventory.
Requirements
R1. Explain the characteristics and the internal control features of an imprest fund.
R2. On November 30, how much cash should the petty cash fund hold before it is replenished?
R3. Journalize all required entries to create the fund and replenish it. Include explanations.
R4. Make the December 1 entry to increase the fund balance to $450. Include an explanation,
and briefly describe what the custodian does.