Solution manual financial accounting 8th by harrison CH04

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Internal Control & Cash Short Exercises (5 min.) S 4-1 Fraud is an intentional misrepresentation of facts, made for the purpose of persuading another party to act in such a way that causes injury or damage to that party The Three Components of the Fraud Triangle Motive - Fraud generally results from either critical need or greed on the part of the perpetrator Regardless of whether the driving force is need or greed most perpetrators are driven to attempt to acquire something that belongs to others Opportunity - The opportunity to commit fraud usually arises through weak internal controls 274 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Rationalization - The perpetrator(s) is (are) convinced, in their own minds, that they deserve the object of the fraudulent behavior They may believe no one else will ever know or even that everybody else is engaging in fraudulent behavior Chapter Internal Control & Cash 275 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (5-10 min.) S 4-2 COMPONENTS OF INTERNAL CONTROL Control environment — Top managers must set the “tone at the top” to establish a control environment Risk assessment — Each company must evaluate its own risks, based upon its particular line of business Control procedures — Specific procedures are needed for a good system of internal control Monitoring of controls — Auditors can monitor a company’s actions and its financial statements Information system — Accurate information is essential for success in business Student responses may vary for the descriptions 276 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (5-10 min.) S 4-3 Separation of duties is essential for safeguarding assets The person who has custody of an asset should not also account for the asset A person who performs both duties can steal the asset and hide the theft by making a bogus entry in the accounting records Student responses may vary Chapter Internal Control & Cash 277 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (5-10 min.) S 4-4 There are several major internal control procedures as discussed in the chapter besides separation of duties: Smart hiring practices The company should be careful to hire both competent and honest personnel Smart hiring practices involve conducting background checks on job applicants, as well as training and supervision on the job Comparisons and compliance monitoring No person or department should be allowed to completely process a transaction from beginning to end without being checked by another person or a computer program Examples of comparisons and compliance monitoring are the use of operating and cash budgets Also, in key functions, one employee (or a computer program) double checks the work of another for accuracy Adequate records help to assure that sufficient hard copy documents or electronic information is kept by the entity to support the validity of transactions that were processed Examples include sales invoices, purchase orders, shipping records, and customer remittance advices Among the benefits of adequate records is the ability to provide an audit trail later 278 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (Continued) S 4-4 for internal or external auditors to follow in auditing the entity’s financial statements Limited access goes hand in hand with separation of duties to assure that only authorized individuals are allowed access to (a) the assets of the company, such as cash or inventory; and (b) the records Generally, only persons with custodial responsibilities (such as the cashier or the warehouse) should be allowed access to assets (such as cash or inventory) Only persons with recordkeeping responsibilities (such as accountants) should have access to the company’s journals and ledgers Proper approvals No transaction should be processed without management’s general or specific approval Generally, the larger the transaction, the higher the organizational level of approval necessary Notice that the first letters of these attributes spell the acronym SCALP That’s an easy and comprehensive way to remember the control procedures involved in internal controls Chapter Internal Control & Cash 279 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S4-5 A computer virus enters program code without your consent and performs destructive action to your computer files or programs A Trojan Horse is a malicious computer program that hides inside a legitimate program and works like a virus to corrupt your computer files or programs A phishing expedition can be a Web site that attracts visitors who may be tricked into revealing their account numbers, social security numbers, passwords, or other valuable data The creator of the Web site then uses the unsuspecting Website visitors’ data to steal from them and for other illicit purposes 280 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (20-30 min.) S 4-6 Cash is important not because of its amount as reported on the balance sheet, but because of its effect on a business 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 a medium of exchange These factors combine to give cash more importance than its account balance would suggest Student responses may vary Chapter Internal Control & Cash 281 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (20-30 min.) S 4-7 Punching a hole through supporting documents reduces the opportunity for fraud Without this control procedure, a dishonest employee could resubmit documents for payment a second time The employee could change the payee’s address and have the check sent to an address the employee controls Or the employee could arrange to have the second payee split the payment with the employee Canceling the documents makes it difficult to get approval for a duplicate payment Student responses may vary 282 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 4-8 Randell Corp Bank Reconciliation October 31, 2010 BANK Balance, October 31 Add: Deposit in transit Less: Outstanding checks Adjusted bank balance BOOKS $3,180 Balance, October 31 Add: 200 Bank collection 3,380 Interest revenue $2,400 530 10 2,940 Less: Service charge (500) NSF check $2,880 Adjusted book balance (20) (40) $2,880 Randell has cash of $2,880 (5 min.) Aug 31 Cash……………………………………… Accounts Receivable……………… Collection on account 530 31 Cash……………………………………… Interest Revenue…………………… Interest earned on bank balance 10 31 Miscellaneous Expense……………… Cash…………………………………… Bank service charge 20 31 Accounts Receivable…………………… Cash…………………………………… NSF check 40 Chapter S 4-9 530 10 20 Internal Control & Cash 40 283 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Decision Cases (20-30 min.) Decision Case Environmental Concerns, Inc Bank Reconciliation September 30, 2010 BANK: Balance, September 30 Add: Deposit of September 30 in transit $ 8,224 3,794 12,018 Less: Outstanding checks ($116 + $150 + $853 + $990 + $206 + $145) Adjusted bank balance, September 30 (2,460) $ 9,558 BOOKS: Balance, September 30 Add: Bank collection Less: Service charge NSF check Adjusted book balance, September 30 $10,402 200 10,602 $ 36 Adjusted balances not agree (44) $10,558 Based on the above reconciliation, it appears the bookkeeper has stolen $1,000, the difference between the adjusted bank and book amounts ($9,558 − $10,558) He understated the total of outstanding checks by $1,000 to cover his theft Benz should assign an employee with no cash-handling duties to prepare the bank reconciliation The bookkeeper should not perform this duty, because a person who handles cash and also prepares the reconciliation can steal cash and manipulate the reconciliation to cover the theft Perhaps Benz should prepare the reconciliation himself 330 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (15-30 min.) Decision Case The internal control weakness in this case is a lack of separation of duties The foreman performs too many duties The foreman hires the workers The foreman controls workers’ employment documents The foreman fills out workers’ time sheets and transmits all documents to the home office The foreman passes out paychecks to workers The workers never go to the home office, so home-office personnel not even know whether all workers exist The foreman could steal from the company as follows: The foreman could enter a fictitious worker into the payroll system and fill out bogus time sheets for the fictitious employee Then the foreman could pocket the pay check written to the employee The foreman could enter more time than actually worked by an employee and arrange to split the extra pay received by the worker The foreman could pad his own hours to receive pay for time that he did not work Chapter Internal Control & Cash 331 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Decision Case The following actions will correct the internal control weakness: The home office could have the construction workers come to the office for processing their employee documents Then home office would at least know that all the workers exist Have employees sign their own time sheets 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 paychecks Occasionally — or always — have a home-office employee go to the construction site to pass out paychecks Have a home-office employee go to the construction site occasionally to “take attendance” of workers on duty that day Then match the names of workers on duty to the time sheets turned in at the end of the week 332 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethical Issue 1 Identify the ethical issue You must decide whether it is ethical for the auditor not to require the bank to record the loss What are the alternatives? Require the client to record the loss, or permit the client not to record the loss Identify the stakeholders The auditor, the bank, and the public at large can be affected The auditor’s reputation is on the line The bank’s financial statements are in question The public can be affected if the bank issues financial statements that include erroneous amounts Assess the possible outcomes If the auditors require the bank to record the loss, the auditor will keep its reputation intact But the auditor will lose the client and also lose the revenue from this large audit The accounting firm may then be unable to expand the firm as it had hoped to (continued on next page) Chapter Internal Control & Cash 333 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Ethical Issues If the auditors okay the bank’s financial statements even after the bank did not record the loss, the auditor would keep the bank as a client, earn the audit revenue, and be able to expand the firm as planned But the bank’s financial statements would report erroneous amounts for the notes receivable People relying on the bank’s financial statements may suffer losses as a result The accounting firm’s reputation would be hurt Make the decision The auditor should require the bank to record the loss even if that means losing the bank as a client By sticking to its belief that the bank should record the loss, the auditors’ reputation will not be harmed as it would by okaying financial statements that include errors It’s far better to lose a client than to lose your reputation (continued on next page) 334 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Ethical Issues Ethical Issue Identify the ethical issue Galvin’s ethical issue is whether to use his knowledge of The Salvation Army’s plans and of Nadar’s situation to either party’s advantage (or disadvantage) Should Galvin help The Salvation Army buy the land at the lowest price? Should he help Nadar sell the land at the highest price? Galvin’s position presents him with a conflict of interest What are the alternatives? There are several: (a) Let other members of the Salvation Army board of directors know of Nadar’s situation in order to help The Salvation Army buy the land at a bargain price (b) Disclose Nadar’s situation to fellow board members and insist that The Salvation Army pay market price ($2.2 million) for the land (c) Advise Nadar of The Salvation Army’s plans and encourage her to hold out for a high price on the sale of the land (d) Reveal nothing to The Salvation Army’s board or to Nadar and take no part in the negotiation between the two parties Chapter Internal Control & Cash 335 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (e) Take a temporary leave of absence from The Salvation Army board for unspecified “personal reasons.” Identify the stakeholders involved Galvin, The Salvation Army, Nadar, and Community Banks Assess the possible consequences Disclosing Nadar’s weakened condition to The Salvation Army board may help The Salvation Army buy the land at a low price, depending on the ethical bearing of fellow board members This would help The Salvation Army and hurt Nadar, relative to her ability to sell the land at market value of $2.2 million Insisting that The Salvation Army offer market price for the land would seem fair to both parties, but that would betray the trust of Nadar And it may or may not sway the board to go along with a $2.2 million offer for the land Making Nadar aware of The Salvation Army’s plans may help Nadar get a higher price for the land than she would get otherwise This would betray the trust of other members of The Salvation Army’s board Remaining silent would preserve Galvin’s integrity However, if either The Salvation Army or Nadar ever learned of Galvin’s 336 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com relationship with the other party, they would wonder whether Galvin used the information against them Taking a temporary leave of absence would preserve Galvin’s integrity and remove him from the conflict of interest It would also preserve Galvin’s reputation for fairness and the reputation of Community Bank for keeping depositor information confidential Make the decision The authors would take the leave of absence and hope other Salvation Army board members not probe Galvin’s “personal reasons.” This way neither The Salvation Army nor Nadar can accuse Galvin of using inside information to the advantage of the other party Chapter Internal Control & Cash 337 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Ethical Issues Ethical Issue Identify the ethical issue French’s ethical issue is whether to tell IMS personnel about Snicker Foods’ possible bankruptcy What are the alternatives? (a) Keep quiet and let nature take its course, or (b) Tell IMS’s top managers of Snicker’s possible bankruptcy Identify the stakeholders involved IMS, Snicker Foods, Community Bank, and everyone connected to these organizations — owners, employees, creditors, depositors, and their communities Assess the possible consequences Telling IMS about Snicker’s possible bankruptcy may help IMS avoid wasted effort on Snicker This may enable IMS to seek more profitable ventures and aid IMS’s recovery In turn, this may help IMS pay its loan to Community Bank 338 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Make the decision French should not tell IMS of Snicker’s financial difficulties (after all, Snicker isn’t bankrupt yet) French should let nature take its course Then she will protect the bank’s (and her own) reputation for keeping client information confidential In her aiding IMS through the loanrestructuring process, French may try to help IMS find other customers that can take up the slack if the sale to Snicker doesn’t go through Chapter Internal Control & Cash 339 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Focus on Financials: Amazon.com, Inc (20-30 min.) Req (All amounts in millions) Bank Books Balance, Dec 31, 2008 + Deposit in transit − Outstanding checks Adjusted bank balance $324 (8) $319 Balance, Dec 31, 2008 + Interest earned + Bank collections Adjusted book balance $316 $319 The adjusted balance ($319 million) agrees with the amount reported for cash and cash equivalents on Amazon.Com, Inc.’s December 31, 2008 Consolidated Balance Sheet Req Paragraph 2, Item 9A of Note 14 to Amazon.com, Inc.’s Consolidated Financial Statements Note Amazon.Com’s management states that: Management is responsible for establishing and maintaining adequate internal control over financial reporting… Management has assessed the effectiveness of our internal over financial reporting as of December 31, 2008…As a result, management has concluded that our internal control over financial reporting was effective in providing assurance 340 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com regarding the reliability of financial reporting and the preparation of financial statements…in accordance with GAAP Ernst & Young has independently assessed the effectiveness of our internal control over financial reporting and its report is included below The statement mentions internal control, reliability of financial reporting, and the fact that the internal control system has been independently assessed by the company’s external independent auditors, Ernst & Young Chapter Internal Control & Cash 341 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Focus on Analysis: Foot Locker, Inc (20-30 min.) Req The seven largest items affecting case are: Sales of short-term investments, which provided $1,620 million, in the investing section Purchases of short-term investments, which used $1,378 million, in the investing section Depreciation and amortization, which provided $166 million Actually, these are expenses that not use cash, so they are added back to income to arrive at cash provided by operations Capital expenditures, which used $148 million, in the investing section Reduction in deferred income taxes, which used $129 million, in the operating section Non-cash impairment charges and store closing program costs, $124 million Again, these are expenses that not use cash, so they are added back to net income to arrive at cash provided by operations Payment of cash dividends, $77 million, in the financing section 342 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Focus on Analysis: Foot Locker, Inc Req Objectives of Internal Control Report of Management States: “The company maintains a system of internal controls designed to provide reasonable assurance, at appropriate cost, that assets are safeguarded, transactions are executed in accordance with management’s authorization, and the accounting records provide a reliable basis for the preparation of financial statements.” Safeguard assets Encourage employees to follow company policy Ensure accurate, reliable accounting records Chapter Internal Control & Cash 343 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Group Project Student responses will vary 344 Financial Accounting 8/e Solutions Manual ... related cash 284 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 4-12 Paying by check carries... records is the ability to provide an audit trail later 278 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com... data to steal from them and for other illicit purposes 280 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com