Chapter 5--Sarbanes-Oxley, Internal Control, and Cash
Student: ___________________________________________________________________________
2. The Sarbanes-Oxley Act of 2002 requires companies to maintain strong and effective internal controls over
3. The Sarbanes-Oxley Act requires companies and their independent accountants to report on the effectiveness
5. All organizations face risks, and the assessment of these risks is necessary so that the objectives of internal
7. There are only two internal control objectives: to ensure accurate financial reports, and to ensure compliance
8. Separating the responsibilities for purchasing, receiving, and paying for equipment is an example of the
14. For a strong internal control system over cash, it is important to have the duties related to cash receipts and
15. A remittance advice is the notification accompanying the check issued to a creditor that states the specific
21. A voucher is the notification accompanying the check issued to a creditor that indicates the specific invoice
23. For efficiency of operations and better control over cash, a company should maintain only one bank
24. The bank informs the depositor of bank service charges by including a debit memorandum with the monthly
25. Bank customers are considered owners of the bank, so the bank shows their accounts as an asset on the
26. A credit memorandum received with a bank statement means the company's bank account has been
27. Depositing all cash, checks, etc. in a bank and paying with checks is an internal control procedure over
28. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the cash balance per
29. In preparing a bank reconciliation, the amount of outstanding checks is added to the cash balance per
30. In preparing a bank reconciliation, the amount indicated by a debit memorandum for bank service charges is
31. In preparing a bank reconciliation, the amount of a canceled check omitted from the depositor's records is
32. The amount of the "adjusted balance" appearing on a bank reconciliation as of a given date is the amount
33. The data needed to adjust a depositor's books are shown in the "adjustments to the depositor's records"
39. A check for $456 was erroneously charged by the bank as $654. In order for the bank reconciliation to
40. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the cash balance per
41. In preparing a bank reconciliation, the amount of outstanding checks is deducted from the cash balance per
42. In preparing a bank reconciliation, the amount indicated by a credit memorandum for a note receivable
43. In preparing a bank reconciliation, the amount indicated by a debit memorandum for bank service charges is
44. A debit memorandum from the bank indicates that the bank has deducted an amount from the depositor's
46. When the petty cash fund is replenished, the petty cash account is adjusted for the total of all expenditures
51. The framework that has become widely accepted as the standard by which companies design, analyze, and
57. Management's philosophy and operating style would affect which of the following elements of internal
65. Which of the following elements of internal control focuses on locating weaknesses and improving control
73. A check drawn by a depositor for $295 in payment of a liability was recorded in the depositor’s book as
74. A check drawn by a depositor for $915 in payment of a liability was recorded in the depositor’s book as
77. Accompanying the bank statement was a debit memorandum for bank service charges. What adjustment is
78. Receipts from cash sales of $5,700 were recorded incorrectly by the depositor as $7,500. The $1,800
79. Receipts from cash sales of $7,500 were recorded incorrectly by the depositor as $5,700. What adjustment is
80. Accompanying the bank statement was a credit memorandum for a short-term note collected by the bank for
81. Accompanying the bank statement was a credit memorandum for a short-term note collected by the bank for
84. Accompanying the bank statement was a debit memorandum for an NSF check received from a customer.
85. A check drawn by a depositor for $810 in payment of a liability was recorded by the depositor as $180. The
87. Accompanying the bank statement was a debit memorandum for an NSF check received from a customer.
94. List the objectives of internal control and give an example of how each is implemented.
95. For each of the following procedures, indicate whether it is an internal control strength or a weakness. Also,
for each weakness, explain why it is a weakness and how it can be corrected.
96. List and define each of the five elements of internal control set forth by the Integrated Framework.
97. Describe the features of a voucher system and list typical supporting documents for a voucher.
98. List the advantages of Electronic Funds Transfers.
99. Using the following information, prepare a bank reconciliation for Salem Co. for May 31, 2013.
100. Using the following information, list the items that will require adjustments to the accounts of Salem Co.
Also, indicate which accounts will increase or decrease due to the adjustment.
101. The bank statement for Marley Co. indicates a balance of $10,000.50 on June 30, 2013. The cash account
for the company had a balance of $4,677.10. Prepare a bank reconciliation on the basis of the following
reconciling items:
(a)
Cash sales of $342 had been erroneously recorded as $324.
(b)
Deposits in transit not recorded by bank, $700.
(c)
Bank debit memorandum for service charges, $30.
(d)
Bank credit memorandum for note collected by bank, $2,050, including $50 interest.
(e)
Bank debit memorandum for $207.40 NSF (not sufficient funds) check from Alice Martin, a customer.
(f)
Checks outstanding, $4,192.80.
102. The bank statement for Marley Co. indicates a cash balance of $10,000.50 on June 30, 2013. The cash
account in Marley's records had a balance of $4,677.10. Illustrate the adjustments to the accounts and their
effect on Marley's financial statements, based on the following reconciling items:
(a)
Cash sales of $342 had been erroneously recorded in the cash receipts journal as $324.
(b)
Deposits in transit not recorded by bank, $700.
(c)
Bank debit memorandum for service charges, $30.
103.
104. Why would a bank require a company to maintain a compensating balance?
105. What is the purpose of the Sarbanes-Oxley Act of 2002, and why was it enacted?
106. Discuss what would be included under personnel policies.
107. Explain why one person should not be permitted to purchase, receive, and pay for supplies.
108. What is a special-purpose cash fund? What is its purpose? Give two examples.
110. Using the following information, prepare a bank reconciliation for Wilkes Co. for May 31, 2013:
Chapter 5--Sarbanes-Oxley, Internal Control, and Cash Key
2. The Sarbanes-Oxley Act of 2002 requires companies to maintain strong and effective internal controls over
3. The Sarbanes-Oxley Act requires companies and their independent accountants to report on the effectiveness
5. All organizations face risks, and the assessment of these risks is necessary so that the objectives of internal
7. There are only two internal control objectives: to ensure accurate financial reports, and to ensure compliance
8. Separating the responsibilities for purchasing, receiving, and paying for equipment is an example of the
14. For a strong internal control system over cash, it is important to have the duties related to cash receipts and
15. A remittance advice is the notification accompanying the check issued to a creditor that states the specific
21. A voucher is the notification accompanying the check issued to a creditor that indicates the specific invoice
23. For efficiency of operations and better control over cash, a company should maintain only one bank
24. The bank informs the depositor of bank service charges by including a debit memorandum with the monthly
25. Bank customers are considered owners of the bank, so the bank shows their accounts as an asset on the
26. A credit memorandum received with a bank statement means the company's bank account has been
27. Depositing all cash, checks, etc. in a bank and paying with checks is an internal control procedure over
28. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the cash balance per
29. In preparing a bank reconciliation, the amount of outstanding checks is added to the cash balance per
30. In preparing a bank reconciliation, the amount indicated by a debit memorandum for bank service charges is
31. In preparing a bank reconciliation, the amount of a canceled check omitted from the depositor's records is
32. The amount of the "adjusted balance" appearing on a bank reconciliation as of a given date is the amount
33. The data needed to adjust a depositor's books are shown in the "adjustments to the depositor's records"
39. A check for $456 was erroneously charged by the bank as $654. In order for the bank reconciliation to
40. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the cash balance per
41. In preparing a bank reconciliation, the amount of outstanding checks is deducted from the cash balance per
42. In preparing a bank reconciliation, the amount indicated by a credit memorandum for a note receivable
43. In preparing a bank reconciliation, the amount indicated by a debit memorandum for bank service charges is
44. A debit memorandum from the bank indicates that the bank has deducted an amount from the depositor's
46. When the petty cash fund is replenished, the petty cash account is adjusted for the total of all expenditures
51. The framework that has become widely accepted as the standard by which companies design, analyze, and
57. Management's philosophy and operating style would affect which of the following elements of internal
65. Which of the following elements of internal control focuses on locating weaknesses and improving control
73. A check drawn by a depositor for $295 in payment of a liability was recorded in the depositor’s book as
74. A check drawn by a depositor for $915 in payment of a liability was recorded in the depositor’s book as
77. Accompanying the bank statement was a debit memorandum for bank service charges. What adjustment is
78. Receipts from cash sales of $5,700 were recorded incorrectly by the depositor as $7,500. The $1,800
79. Receipts from cash sales of $7,500 were recorded incorrectly by the depositor as $5,700. What adjustment is
80. Accompanying the bank statement was a credit memorandum for a short-term note collected by the bank for
81. Accompanying the bank statement was a credit memorandum for a short-term note collected by the bank for
84. Accompanying the bank statement was a debit memorandum for an NSF check received from a customer.
85. A check drawn by a depositor for $810 in payment of a liability was recorded by the depositor as $180. The
87. Accompanying the bank statement was a debit memorandum for an NSF check received from a customer.
94. List the objectives of internal control and give an example of how each is implemented.
The objectives of internal control are to provide reasonable assurance that:
(1)
Assets are safeguarded and used for business purposes.
(2)
Business information is accurate.
(3)
Employees comply with laws and regulations.
Examples are:
(1)
Duties are separated.
(2)
Duties are rotated.
(3)
Reports are submitted to management.
There are many other examples that would be correct.
95. For each of the following procedures, indicate whether it is an internal control strength or a weakness. Also,
for each weakness, explain why it is a weakness and how it can be corrected.
(a)
Only the best accounting graduates are hired to eliminate the need for training.
(b)
The person responsible for ordering and receiving supplies is not permitted to record or pay for the supplies.
(c)
Company policy mandates that all employees take vacation time.
(d)
Internal auditors constantly monitor the internal control system.
(e)
The accountant deposits cash at least once each day to prevent holding large amounts of cash on hand.
96. List and define each of the five elements of internal control set forth by the Integrated Framework.
97. Describe the features of a voucher system and list typical supporting documents for a voucher.
A voucher system is used to control cash disbursements. For example, the voucher system should provide
reasonable assurance that only authorized payments are made. Another example is that a voucher system should
ensure that all cash discounts are taken.
Specifically, a voucher system is a set of procedures for authorizing and recording liabilities and cash payments.
It usually consists of vouchers, a file for unpaid vouchers, and a file for paid vouchers.
Typical supporting documents for a voucher are a supplier's invoice, a purchase order, and a receiving report.
98. List the advantages of Electronic Funds Transfers.
Advantage:
(1) EFTs cost less than receiving cash payments through the mail.
(2) EFTs enhances internal controls over cash since the cash is received directly by the bank without any
employees handling cash.
(3) EFTs reduces late payments from customers and speed up the processing of cash receipts.
99. Using the following information, prepare a bank reconciliation for Salem Co. for May 31, 2013.
100. Using the following information, list the items that will require adjustments to the accounts of Salem Co.
Also, indicate which accounts will increase or decrease due to the adjustment.
(a)
The bank statement balance is $2,597.
(b)
The cash account balance is $2,680.
101. The bank statement for Marley Co. indicates a balance of $10,000.50 on June 30, 2013. The cash account
for the company had a balance of $4,677.10. Prepare a bank reconciliation on the basis of the following
reconciling items:
(a)
Cash sales of $342 had been erroneously recorded as $324.
(b)
Deposits in transit not recorded by bank, $700.
Add: Deposits in transit not recorded by bank
700.00
$10,700.50
Error in recording cash sales of $342 as $324
18.00
$6,745.10
Bank service charges
30.00
237.40
102. The bank statement for Marley Co. indicates a cash balance of $10,000.50 on June 30, 2013. The cash
account in Marley's records had a balance of $4,677.10. Illustrate the adjustments to the accounts and their
effect on Marley's financial statements, based on the following reconciling items:
(a)
Cash sales of $342 had been erroneously recorded in the cash receipts journal as $324.
(b)
Deposits in transit not recorded by bank, $700.
(c)
Bank debit memorandum for service charges, $30.
(d)
Bank credit memorandum for note collected by bank, $2,050, including $50 interest.
(e)
Bank debit memorandum for $207.40 NSF (not sufficient funds) check from Alice Martin, a customer.
(f)
Checks outstanding, $4,192.80.
o
c
k
(a)
18.00
18.00
(c)
-30.00
-30.00
(d)
2,050.00
-2,000.00
50.00
(e)
-207.40
207.40
Operating
18.00
Sales Revenue
18.00
Operating
-30.00
Service Charge
-30.00
Operating
50.00
Interest Income
50.00
103.
104. Why would a bank require a company to maintain a compensating balance?
105. What is the purpose of the Sarbanes-Oxley Act of 2002, and why was it enacted?
106. Discuss what would be included under personnel policies.
107. Explain why one person should not be permitted to purchase, receive, and pay for supplies.
108. What is a special-purpose cash fund? What is its purpose? Give two examples.
procedures.
(1) Mandatory vacations
(2) Personnel policies
(3) Report of outside consultants on future market changes
(1) (c) control procedures
(2) (a) the control environment
(3) (b) risk assessment
110. Using the following information, prepare a bank reconciliation for Wilkes Co. for May 31, 2013: