Chapter 7: Q4RQ (page 411)
Question: What is the difference between an internal auditor and an external auditor?
Answer
The main difference between the internal and external auditor is that the internal auditor is a regular team member of the organization and the external auditor is not.
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Understanding the Sarbanes-Oxley Act and identifying internal control strengths and weaknesses. The following situations suggest a strength or a weakness in internal control.
a. Top managers delegate all internal control procedures to the accounting department.
b. Accounting department staff (or the bookkeeper) orders merchandise and approves invoices for payment.
c. Cash received over the counter is controlled by the sales clerk, who rings up the sale and places the cash in the register. The sales clerk matches the total recorded by the register to each day’s cash sales.
d. The employee who signs checks need not examine the payment packet because he is confident the amounts are correct.
Requirements
1. Define internalcontrol.
2. The system of internal control must be tested by external auditors. What law or rule requires this testing?
3. Identify each item in the list above as either a strength or a weakness in internal control, and give your reason for each answer.
Accounting for petty cash transactions
Suppose that on June 1, Rockin’ Gyrations, a disc jockey service, creates a petty cash
fund with an imprest balance of \(300. During June, Michael Martell, fund custodian,
signs the following petty cash tickets:
Petty Cash
Ticket Number Item Amount
1 Postage for package received \) 30
2 Office party 25
3 Two boxes of stationery 20
4 Printer cartridges 15
5 Business dinner 65
On June 30, prior to replenishment, the fund contains these tickets plus cash of \(140.
The accounts affected by petty cash payments are Office Supplies, Entertainment
Expense, and Postage Expense.
Requirements
1. On June 30, how much cash should this petty cash fund hold before it is replenished?
2. Journalize all required entries to (a) create the fund and (b) replenish it. Includeexplanations.
3. Make the entry on July 1 to increase the fund balance to \)325. Include an explanation
Preparing a bank reconciliation and journal entries
The May cash records of Donald Insurance follow:
Cash Receipts Cash Payments
Date Cash Debit Check No. Cash Credit
May 4 \( 4,230 1416 \) 890
9 520 1417 120
14 530 1418 630
17 1,950 1419 1,090
31 1,840 1420 1,420
1421 900
1422 670
Donald’s Cash account shows a balance of \(17,750 at May 31. On May 31, Donald
Insurance received the following bank statement:
Deposits and other Credits:
May 10
May 1
May 5
May 15
May 18
May 22
Checks and other Debits:
8
11 (check no. 1416)
19
22 (check no. 1417)
29 (check no. 1418)
31 (check no. 1419)
May
May
May
May
May
May
May 31
Ending Balance
Beginning Balance
EFT \) 450
NSF
EFT
BC
\( 18,730
1,700
890
1,100
120
520
4,230
530
1,950
\) 14,400
9,380
375
630
1,900
35 (5,050)
Bank Statement for May
SC
Explanations: BC–bank collection; EFT–electronic funds transfer;
NSF–nonsufficient funds checks; SC–service charge
Additional data for the bank reconciliation follow:
a. The EFT credit was a receipt of rent. The EFT debit was an insurance
payment.
b. The NSF check was received from a customer.
c. The \(1,700 bank collection was for a note receivable.
d. The correct amount of check 1419, for rent expense, is \)1,900. Donald’s controller
mistakenly recorded the check for $1,090.
Requirements
1. Prepare the bank reconciliation of Donald Insurance at May 31, 2018.
2. Journalize any required entries from the bank reconciliation
This case is based on an actual situation. Centennial Construction Company, headquartered in Dallas, Texas, built a Rodeway Motel 35 miles north of Dallas. The construction foreman, whose name was Slim Chance, hired the 40 workers needed to complete the project. Slim had the construction workers fill out the necessary tax forms, and he sent their documents to the home office. Work on the motel began on April 1 and ended September 1. Each week,Slim filled out a time card of hours worked by each employee during the week. Slim faxed the time cards to the home office, which prepared the payroll checks on Friday morning. Slim drove to the home office on Friday, picked up the payroll checks, and returned to the construction site. At 5 p.m. on Friday, Slim distributed payroll checks to the workers.
Requirements
1. Describe in detail the main internal control weakness in this situation. Specify what negative result(s) could occur because of the internal control weakness.
2. Describe what you would do to correct the internal control weakness.
Accounting for petty cash transactions
Suppose that on September 1, Cool Gyrations, a disc jockey service, create a petty
cash fund with an imprest balance of \(350. During September, Ruth Mangan, fund
custodian, signs the following petty cash tickets:
Petty Cash
Ticket Number Item Amount
1 Postage for package received \) 25
2 Office party 10
3 Two boxes of stationery 20
4 Printer cartridges 15
5 Business dinner 65
On September 30, prior to replenishment, the fund contains these tickets plus cash of
\(210. The accounts affected by petty cash payments are Office Supplies, Entertainment
Expense, and Postage Expense.
Requirements
1. On September 30, how much cash should this petty cash fund hold before it is
replenished?
2. Journalize all required entries to (a) create the fund and (b) replenish it. Include
explanations.
3. Make the entry on October 1 to increase the fund balance to \)425. Include an
Explanation
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