SM Chapter 07

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Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
CHAPTER 7
Internal Control and Cash
ASSIGNMENT CLASSIFICATION TABLE
Brief A B
Study Objectives Questions Exercises Exercises Problems Problems BPY
1. Describe the 1, 2, 3, 4, 1, 2, 3, 4 1, 2, 3, 4 1A, 2A, 1B, 2B, 1, 3, 4,

primary 5, 6 3A, 4A 3B, 4B 7
components of an
internal control
system.
2. Apply key control 7, 8, 9, 10, 3, 4 3, 4 1A, 2A, 1B, 2B, 4, 7

activities to cash 11, 12, 13 3A, 4A 3B, 4B
receipts and
payments.
3. Prepare a bank 12, 13, 14, 5, 6, 7, 8, 5, 6, 7, 8 5A, 6A, 7A 5B, 6B, 5

reconciliation. 15, 16, 17 9, 10, 11 7B
4. Explain the 18, 19, 20, 12, 13 9, 10 8A, 9A, 8B, 9B, 2, 6
reporting and 21, 22 10A 10B
management of
cash.
Solutions Manual 7-1 Chapter 7

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ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Time

Number Description Level Allotted (min.)
1A Identify control activities over cash receipts. Simple 20-30
2A Identify control weaknesses over cash payments. Simple 20-30
3A Identify control weaknesses. Moderate 30-40
4A Identify control weaknesses over cash receipts and Complex 40-50

payments.
5A Prepare bank reconciliation and adjusting entries. Moderate 30-40
8A Calculate cash. Moderate 15-20
9A Discuss reporting of cash. Simple 15-20
10A Recommend cash management improvements. Moderate 20-30
1B Identify control activities over cash payments. Simple 20-30
2B Identify control weaknesses over cash receipts. Simple 20-30
3B Identify control weakness. Moderate 30-40
4B Identify control weaknesses over cash receipts and Complex 40-50

payments.
5B Prepare bank reconciliation and adjusting entries. Moderate 30-40
8B Calculate cash. Moderate 15-20
9B Discuss reporting of cash. Simple 15-20
11B Recommend cash management improvements. Moderate 20-30

ANSWERS TO QUESTIONS
1. The five primary components of a good internal control system include the control
environment, risk assessment, control activities, information and communication, and
monitoring.
A control environment encourages integrity and a high standard of ethical behaviour. Risk
assessment involves identification and management of key business risks. Control
activities are policies and procedures to help mitigate the business risks. Information and
communication ensures that the internal control system captures and communicates the
appropriate information to internal and external users. Monitoring the internal control
system for its adequacy is a recurring process.
2. The six control activities that apply to most companies are authorization of transactions
and activities, segregation of duties, documentation, physical controls, independent
checks of performance, and human resource controls.
3. Documentation procedures contribute to good internal control by providing evidence of

the occurrence of transactions and events and, when signatures (or initials) are added,
the documents establish responsibility for the transactions. The prompt transmittal of
documents to the accounting department contributes to recording transactions in the
proper period, and the pre-numbering of documents helps to ensure that a transaction is
recorded only once.
4. Independent review is necessary because employees can forget to, or intentionally fail
to follow internal controls, or they might become careless if there is no one to observe
and evaluate their performance. Segregating the physical custody of assets from
accounting record keeping is not enough to ensure that nothing has been stolen. A
performance review still needs to be done. In such a review, the accounting records are
compared with existing assets or with external sources of information. The review helps
ensure accuracy.
5. Retail stores that do not conduct criminal checks when hiring employees are missing the
human resource control activity. These stores are accepting increased risk of employee
theft and fraud.
6. A company’s system of internal control can only give reasonable assurance that assets
are properly safeguarded and that accounting records are reliable because the cost of a
perfect system outweighs its benefits. For example, if a company wanted flawless
accounting records, they could double the number of accountants on staff and have the
new accountants check all of the work that was done by experienced accountants but
the benefit of this is outweighed by the costs. Absolute assurance is too costly.
Furthermore, even if cost was not a factor, human error and collusion cannot be
eliminated.

Answers to Questions (Continued)
7. Electronic funds transfers normally result in better internal control since no cash or
cheques are handled by employees, thereby limiting the possibility of misappropriation.
However, controls over EFT payments (and collections) do need to be put in place.
8. This is a violation of authorization of transactions. Each cash register should only be used
by one employee and an independent verification of the cash in each register at the end
of each shift should be compared to the total of the sales recorded in the cash register
plus the float (coins and bills for making change) in the register. If a discrepancy arises,
the employee responsible for that register can be held responsible.
9. Cash registers are visible to the customer. Thus, they prevent the sales clerk from ringing
up a lower amount and pocketing the difference. In addition, the customer receives an
itemized receipt, and the cash register tape is locked into the register for further
verification. Having scanners reduces the chance of error in entering the price of an item.
10. This statement is true if the alternative to a cheque payment is one done with cash. It is
not always practical to make all payments by cheque but payment by cheque contributes
to effective internal control over cash disbursements as it provides a record of all
payments. Also, having only authorized individuals sign the cheques reduces the
likelihood of payments being made for unauthorized amounts or to unauthorized vendors.
11. The receptionist has an opportunity to commit fraud. In the case of an appointment where
the customer pays cash, the cash can be pocketed by the receptionist. The receptionist
can then cancel the appointment, leaving no trace in the accounting records of the
revenue generated by the service. This is a clear case of lack of segregation of duties.
12. An employee who has no other responsibilities that relate to cash should prepare the
bank reconciliation. If a person had responsibility for handling cash and also prepared
the bank reconciliation, they could use the bank reconciliation to hide fraud by falsifying
the bank balance or misstating reconciling items.
13. A bank contributes significantly to internal control over cash because it: (1) safeguards
cash on deposit, (2) minimizes the amount of cash that must be kept on hand, and (3)
provides another record of all bank transactions.
14. The lack of agreement between the cash balances may be due to either:
(1) Time lags—caused by recording a transaction on the company’s books in one month
and the bank recording it another month (example – outstanding cheque) or the bank
recording a transaction first which the company will record after completing the bank
reconciliation (example – a bank service charge, or an NSF cheque).
(2) Errors—made by either the company or the bank. For example, a cheque for $110 is
recorded by the depositor at $101.


15. (a) An NSF cheque is a cheque issued by a customer that was recorded by the
company when it was received and then deposited in the bank only to discover later
that the customer did not have the funds to cover the cheque payment.
(b) An NSF cheque makes the bank balance lower than the book balance and requires
the book balance to be adjusted. Consequently, it is deducted from the balance per
books.
(c) An NSF cheque results in an adjusting entry in the company’s books, as a debit to
Accounts Receivable and a credit to Cash (assuming the cheque deposited was a
collection on account). The debit to Accounts Receivable includes any additional
charge that the bank may add for their services with respect to the NSF cheque or
the company may add for late payment.
16. Since the March cheque has still not cleared the bank at April 30, it must be included in
the April 30th bank reconciliation as an outstanding cheque.
17. When performing a bank reconciliation, outstanding cheques are subtracted from the
bank balance to “move” that balance closer to the one recorded on the company’s books.
Since the bank balance is lower than the book balance by the amount of this fraud, Sam
will understate the amount of outstanding cheques on the reconciliation. For example, if
there was no fraud, let’s assume that the bank balance would be $5,000 and that the
outstanding cheques were $3,000 so the book balance should be $2,000. After the fraud
the book balance is still $2,000 but the bank balance is now $3,300 instead of $5,000.
When Sam does the reconciliation he has to make sure that the $3,300 will reconcile to
$2,000 so he will list the outstanding cheques as only $1,300, thereby understating them
by the amount of cash he has stolen. The real outstanding cheques of $3,000 less the
stolen amount of $1,700, equals $1,300.
18. Cash includes cash on hand and cash in bank accounts, including any debit and bank
credit card slips. Cash equivalents include short-term, highly liquid trading investments
less any bank overdrafts. Together, these two amounts combine and are reported as
cash and cash equivalents in the current assets section of the statement of financial
position.
19. Restricted cash is not available for general use as it is restricted for a special purpose.
When the restricted purpose is of a long-term nature, the restricted cash is reported as a
non-current asset. If it is expected to be used within one year of the statement of financial
position date, it would be classified as a current asset and disclosed in the financial
statements. Compensating balances are minimum cash balances which lenders specify
that a borrower must maintain in the borrower’s bank account to provide support for a
loan. A compensating balance should be reported as a non-current asset and the details
of the loan conditions should be disclosed in the notes to the financial statements.


20. The line of credit facility of $16 million does not represent a liability, until Brandon
Corporation borrows (or draws) money under the line of credit. In the notes to the
financial statement the terms of the line of credit facility and its available limit of $16
million should be reported to demonstrate how the business is well positioned to deal
with future cash flow demands or take advantage of investment opportunities.
21. The basic principles of cash management are: (1) increase the speed of collection on
receivables, (2) keep inventory levels low, (3) delay payment of liabilities, (4) plan the
timing of major expenditures, (5) invest idle cash, and (6) prepare a cash budget. The
first three principles are ways to increase cash on hand. The last three principles focus
on making sure management understands when cash balances will be high so that
investment income can be earned from idle cash and when cash balances will be low so
that bank loans or other financing can be obtained.
22. Having too much cash on hand may hinder a business’ performance if the cash cannot
be used effectively and therefore not give a proper return to the shareholders. Effective
uses of cash can include upgrading existing property, plant, and equipment, expanding
the business, paying down debt, repurchasing shares, or paying dividends.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 7-1
Control Activity Example
Authorization of transactions and One person operates the cash register at the exit of the
activities parking garage.
Segregation of duties Tickets are provided to those entering the garage by an

automated machine. This ticket is given to the attendant
on exiting the parking garage. In this way, the attendant
does not authorize the parking and collect the cash.
Documentation The time on the ticket is entered into a machine to

determine the amount owed, which is keyed into the cash
register before the gate will open. In this way the total time
in the parking garage is recorded.
Physical controls Cash is kept in a cash register.
Independent checks of performance If a customer is overcharged, they will complain.

Review to make sure parking gate is not being raised prior
to payment being received.
Human resource controls Employees working the cash register are bonded. This
allows for insurance to be purchased covering theft or
robbery.
BRIEF EXERCISE 7-2
(a) 3 All transactions should include original, detailed receipts.

(b) 4 Undeposited cash should be stored in the company safe.
(c) 6 Employees must take their full vacation allotment each year.
(d) 5 Surprise cash counts are performed by internal audit.
(e) 1 Responsibility for related activities should be assigned to specific employees.
(f) 2 Cheque signers are not allowed to record cash transactions

BRIEF EXERCISE 7-3
1. Documentation and physical controls

2. Human resource controls
3. Independent checks of performance
4. Segregation of duties
5. Authorization of transactions and activities
6. Physical controls
BRIEF EXERCISE 7-4
1. Documentation
2. Independent checks of performance
4. Authorization of transactions and activities
5. Segregation of duties
BRIEF EXERCISE 7-5
1. Book – 7. Book +
2. Book + 8. Book –
3. Bank – 9. Book –
4. Bank – 10. Bank +
5. NA 11. Book –
6. Bank + 12. Bank –
BRIEF EXERCISE 7-6
January deposits in transit:
Deposits in transit at beginning of month........................................................ $ 0

Add: Deposits recorded in company books this month .................................. 5,000
Less: Deposits recorded on this month’s bank statement .............................. 4,000
Deposits in transit at end of month ................................................................. $1,000
February deposits in transit:
Deposits in transit at beginning of month........................................................ $1,000

Add: Deposits recorded in company books this month .................................. 5,600
Less: Deposits recorded on this month’s bank statement .............................. 4,600
Deposits in transit at end of month ................................................................. $2,000

BRIEF EXERCISE 7-7
November outstanding cheques:
Outstanding cheques at beginning of month .................................................. $ 0

Add: Cheques recorded in company books this month .................................. 12,600
Less: Cheques recorded on this month’s bank statement.............................. 11,100
Outstanding cheques at end of month............................................................ $ 1,500
December outstanding deposits:
Outstanding cheques at beginning of month .................................................. $1,500

Add: Cheques recorded in company books this month .................................. 9,500
Less: Cheques recorded on this month’s bank statement.............................. 9,900
Outstanding cheques at end of month............................................................ $1,100
BRIEF EXERCISE 7-8
(a) Kashechewan should correct its books for the error in recording the cheque by
reducing cash by $18 ($86 – $68).
The cheque mistakenly deducted by the bank should be added back to the bank
balance since it is the bank’s error.
(b) Accounts Payable ..................................................................... 18

Cash ........................................................................... 18
No entry is necessary for the cheque mistakenly deducted by the bank, although the
bank should be notified of this error.
BRIEF EXERCISE 7-9
June 30, adjusted cash balance per bank reconciliation ................. $18,920
Add: Cash receipts in July ............................................................... 21,700
Less: Cash disbursements in July ................................................... 24,300
July 31, unadjusted cash balance.................................................... $16,320

BRIEF EXERCISE 7-10
Cash balance per bank $15,840

Add: Deposits in transit 4,300
20,140
Less: Outstanding cheques 2,300
Adjusted cash balance per bank $17,840
Cash balance per books (as per BE7-9) $16,320

Add: EFT collections on account 1,960
18,280
Less: Bank service charge $ 70
NSF cheque and fee ($290 + $80) 370
440
Adjusted cash balance per books $17,840
BRIEF EXERCISE 7-11
July 31 Cash ......................................................................... 1,960

Accounts Receivable......................................... 1,960
Bank Charges Expense ............................................ 70

Cash.................................................................. 70
Accounts Receivable ................................................ 370

Cash.................................................................. 370
BRIEF EXERCISE 7-12
Ouellette Ltée should report the cash in the bank, the payroll bank account, and the cash
register floats as cash. The trading investments would be reported as cash equivalents
because they mature within 90 days. Cash and cash equivalents are recorded as a current
asset. Assuming the restricted cash is not expected to be used during the next year, the
restricted cash for the plant expansion should be reported as a non-current asset. The
compensating balance should also be reported as a non-current asset and disclosed in the
notes.
BRIEF EXERCISE 7-13
Cash and cash equivalents should be reported at $45,100 ($12,000 + $1,700 + $24,000 +
$5,000 + $2,400). Note that all of these items are actually cash. The company has no cash
equivalents. The other items are receivables. The income tax refund due from CRA is a
receivable until collected. Postdated cheques are also receivables until they can be cashed.

SOLUTIONS TO EXERCISES
EXERCISE 7-1
(a) (b)
Control Strength or Weakness Suggested Improvements
1. No establishment of responsibility over The employees should use separate cash

the cash – weakness drawers.
Cash counts not performed Cash counts should be performed by a

independently – weakness supervisor at the end of the shift and the
totals compared to the cash register reading.
2. By shredding the receipts there is no Retain supporting information until such time
record maintained of sales for as all independent verification is complete (a
independent internal or external comparison of the receipts to the sales
verification – weakness recorded in the accounting records). Shred
the receipts only after the verification is
complete.
3. Cash receipts procedures appear to NA

illustrate good internal control – the
segregation of duties between
receiving, recording and depositing
cash greatly reduces the likelihood of
cash being stolen or recorded
incorrectly – strength
4. Improper segregation of duties could Different individuals should receive cash,

result in the misappropriation of cash record cash receipts and deposit the cash.
and the ability to misstate the
accounting records to cover up the In a small business this may be impossible;
misappropriation – weakness therefore, it is imperative that management
take an active role in the operations and
supervision of the business to enable
detection of any accounting irregularities.
5. The procedures in place to conduct the NA

physical inventory count appear to be
reasonable – strength

EXERCISE 7-2
1. (a) It is possible to detect this type of fraud by comparing the amount of inventory
consumed during the evening with the sales that were recorded in cash registers.
(b) This fraud can be prevented by segregating the duties of those individuals
handling the drinks to those individuals having access to the cash register. If
additional staff is not available, the floor supervisor should keep a close eye on the
bartender or inventory could be counted once a day.
2. (a) It is possible to detect this type of fraud as the bottles of liquor sold to
establishments are not the same as those sold at a liquor store. A special label is
attached, which can be detected at the end of the shift. As well, if the additional
empty bottles are on hand at the end of the shift, when the inventory consumed
(including the bartender’s bottle) at the end of the bartender’s shift is compared to
sales, a discrepancy will be noticed.
handling the drinks to those individuals having access to the cash register. If
additional staff is not available, the floor supervisor should keep a close eye on the
bartender and do a bottle count at the end of the shift.
3. (a) It is possible to detect this type of fraud if someone notices that the number of
appointments and services given by the spa does not reconcile to the revenue
deposited in the bank account for the day. Most businesses of this nature will have
someone comparing the bank deposit slips with the appointment schedule (often
the schedule will be printed off a day or day prior to the schedule date).
handling the appointments, to those handing the cash, and again to those
individuals making the bank deposit. If additional staff is not available, the owner of
the spa should at least make the bank deposit and require that the appointments
be written in ink.
4. (a) It is possible to detect this type of fraud but likely only after the first instance of
fraud. The individual in charge of approving the bank reconciliation could insist on
looking at the cheques returned by the bank and detect the unauthorized cheque.
handling the cheques with the individual preparing the bank reconciliation, and by
being vigilant in scrutinizing the bank reconciliation and its supporting documents.

EXERCISE 7-3
(a) (b)
Recommended
Weakness Control Activity Improvement
1. Cashiers are not bonded. Human resource All cashiers should be

controls bonded.
2. Inability to fix responsibility Authorization of There should be separate

for cash to a specific clerk. transactions and cash drawers and register
activities codes for each clerk.
3. Cash is not adequately Physical controls Cash should be stored in a

protected from theft. locked safe until it is
deposited in the bank.
4. Cash is not independently Independent checks A cashier office supervisor

counted. of performance should count cash and
reconcile the amount of cash
received to the cash register
reading.
5. The accountant should not Segregation of duties The cashier’s department

handle cash and record cash should make the deposits.
transactions.
6. Some sales will not be Documentation and All sales should be entered in
recorded so that they can be physical controls the cash register to provide
independently verified later; evidence the transaction has
cash is not adequately occurred. In addition, the
protected from theft. loose change box should be
locked to keep it safe until the
funds are deposited.

EXERCISE 7-4
(a) (b)
Recommended
Weakness Control Activity Improvement
1. Cheques are not Physical controls Cheques should be stored in a safe or

stored in a secure locked file drawer.
area.
2. The approval of and Authorization and The purchasing manager should not
payment to suppliers segregation of approve bills for payment nor should this
is done by the wrong duties manager have signing authority. An
employee. employee, other than one involved with
purchasing, who is aware of delivery of
goods and services should be authorizing
the payment and another member of
senior management should be signing
cheques.
3. Blank cheques are Authorization of Establish a second signing authority with

signed. transactions and the bank.
activities
4. Cheques are not Documentation Cheques should be prenumbered and

prenumbered. their serial continuity subsequently tested
for completeness.
5. The bank Independent A person independent of the accountant

reconciliation is not checks of should prepare the bank reconciliation. If
independently performance this is not possible, then the accountant
prepared. can prepare the reconciliation but the
owner not the store manager (because
they can access cash) should approve it.

EXERCISE 7-5
(a)
August 31 adjusted cash balance per bank reconciliation ............................ $ 54,700
Add: (4) Cash deposits in September ......................................................... 128,658
Less: (1) Cheques issued .................................................... $127,492
(2) Salaries deposited to employees accounts ........... 49,900
(3) Monthly EFT payment for insurance ..................... 1,500 178,892
September, unadjusted cash balance .......................................................... $ 4,466
(b) None of the above items would be included in the bank reconciliation as they are
included in the starting (unadjusted) cash balance and already have been recorded by
the company.
EXERCISE 7-6
Bank Books
Item Add Deduct Add Deduct Adjusting
(Credit) (Debit) (Debit) (Credit) Entry
1. Deposits in transit at the end of √ No
April
2. Deposits in transit at the
beginning of April that cleared NA NA NA NA No
the bank in April
3. Outstanding cheques at the end √ No
of April
4. Outstanding cheques at the
beginning of April that cleared NA NA NA NA No
the bank in April
5. Cheque written for $250
recorded in error as $520 on the √ Yes
books
6. Deposit of $400 made in error
by the bank to the company’s √ No
account
7. Bank service charges √ Yes
8. EFT, collection on account not √ Yes
previously recorded by company
9. NSF cheque received from √ Yes
customer
10. Interest earned on bank account √ Yes

EXERCISE 7-7
(a) Deposits in transit: July 31
Deposits in transit, June 30 .................................................. $ 2,000
Add: Deposits recorded in company books in July .............. 14,750
Less: Deposits recorded on bank statement in July............. 15,820
Deposits in transit, July 31 .................................................... $ 930
Deposits in transit: August 31

Deposits in transit, July 31 .................................................... $ 930
Add: Deposits per books in company books in August ........ 22,900
Less: Deposits recorded on bank statement in August ........ 22,500
Deposits in transit, August 31 ............................................... $ 1,330
(b) Outstanding cheques: July 31

Outstanding cheques, June 30 ............................................. $ 570
Add: Cheques recorded in company books in July ............... 18,200
Less: Cheques recorded on July bank statement ................. 17,200
Outstanding cheques, July 31 .............................................. $ 1,570
Outstanding cheques: August 31

Outstanding cheques, July 31 .............................................. $ 1,570
Add: Cheques recorded in company books in August .......... 22,700
Less: Cheques recorded on August bank statement ............ 23,520
Outstanding cheques, August 31 .......................................... $ 750

EXERCISE 7-8
(a)
NEOPOLITAN LTD.
Bank Reconciliation
July 31
Cash balance per bank statement $ 8,833

Add: Deposits in transit $1,575
Cheque No. 373 error ($762 – $672) 90
1,665
10,498
Less: Outstanding cheques 2,449
Adjusted cash balance per bank $ 8,049
Cash balance per books $7,190

Add: EFT deposits 883
8,073
Less: Bank service charges 24
Adjusted cash balance per books $8,049
(b) July 31 Cash ................................................................. 883

Accounts Receivable ................................... 883
31 Bank Charges Expense .................................... 24

Cash ............................................................ 24

EXERCISE 7-9
(a) Items that are considered cash but not cash equivalents would include:
1. Currency and coin $ 87

3. April cheques 300
5. Royal Bank chequing account 2,575
6. Royal Bank savings account 4,000
9. Cash register floats 250
10. Over-the-counter receipts ($550 + $185 + $685 + $755) 2,175
Total cash $9,387
2. The $10,000 government treasury bill is considered a cash equivalent because it

matures within 90 days and the value at which it will mature at is certain.
(b) Cash and cash equivalents = $9,387 [from (a)] + $10,000 = $19,387
(c) 4. Post-dated cheque—Accounts Receivable; Statement of Financial Position

7. Prepaid postage in postage meter—Supplies; Statement of Financial Position
8. IOU from company receptionist—Advances to Employees; Statement of Financial
Position
EXERCISE 7-10
Suggestions to improve cash management practices for Tory, Hachey, and Wedunn:
1. Prepare a cash budget.

2. Adopt a time docketing accounting system which will track work performed on files for
individual clients.
3. Invoice clients monthly as work progresses using the accounting records established for
docketing time.
4. To the extent practicable, ask clients for retainers before work on files begins. Use the
retainers received to apply payments for monthly invoices sent to clients.
5. When retainers are used up, request additional retainers until the case is completed.
6. Establish an operating line of credit with the bank for day-to-day operations.
7. Arrange a non-current loan for renovations and equipment with repayment terms
structured to coincide with expected future cash inflows.
8. Negotiate terms with suppliers that allow for delayed payments.
9. To the extent necessary, obtain additional investments from the three lawyers to ensure
payment to suppliers and employees are made on time.

SOLUTIONS TO PROBLEMS
PROBLEM 7-1A
(a) Control Activities Application to Cash Receipts
Authorization of transactions and Only cashiers are authorized to sell tickets. Only
activities the manager and cashier can handle cash. Only
ushers authorize entrance.
Segregation of duties The duties of receiving cash and admitting

customers are assigned to the cashier and to the
doorperson. The manager maintains custody of
the cash, and the company accountant records
the cash.
Documentation Tickets are prenumbered. Cash count sheets are

prepared and initialled. Deposit slips are
prepared.
Physical controls Cash is deposited in a bank vault nightly.

Prenumbered tickets are locked into the machine
by the manager and the machine is used to issue
tickets.
Independent checks of Cash counts are made by the manager at the

performance end of each cashier’s shift. Daily comparisons
are made by the head cashier and accounting
department of cash received, deposited and
recorded.
Human resource controls Cashiers are bonded.
(b) Actions by the usher and cashier to collaborate to misappropriate cash include:
1. Instead of tearing the tickets, the usher could return the tickets to the cashier who
could resell them, and the two could divide the cash.
2. The cashier could issue a lower priced ticket than paid for and the usher would
admit the customer. The difference between the ticket issued and the cash received
could be divided between the usher and cashier.

PROBLEM 7-2A
(a)Control Weaknesses (b) Improvements
Fred or Asmaa can order goods (authorization) John or Rehana should be

and approve invoices for payment (up to $20,000 authorizing the purchase of goods.
for Fred and up to $5,000 for Asmaa). Fred is the
sole signer of cheques less than $20,000. Fred
could purchase items for personal use or create
and pay invoices to companies that he owns.
Fred signs cheques and prepares the bank Someone who does not record cash
reconciliation. Fred could write a cheque to transactions or has access to cash
himself and cover it up in the bank reconciliation and cheques should prepare the bank
and/or through adjusting journal entries. reconciliation. If this is not possible,
then one of the owners should either
prepare or at least review and
approve the reconciliation.
One person can sign cheques At least two individuals should sign
each cheque to prevent inappropriate
expenditures.

PROBLEM 7-3A
(a) Control Weaknesses (b) Recommendations
1. No segregation of duties between receiving the The duties of receiving cash and
cash and admitting students to the lessons. The admitting students should be
instructor could admit students for free or charge assigned to separate individuals.
extra and pocket the difference or report fewer
students and pocket the extra money.
2. There is no segregation of duties in the accounting An independent person should

function. The general manager could prepare approve the invoices for payment
fictitious invoices for payment or write cheques to and prepare the bank
himself and not be detected because the general reconciliations.
manager also prepares the bank reconciliation.
3. Each sales person is responsible for determining An independent and experienced

credit policies and they receive a commission person should be responsible for
based on sales. They could provide credit to setting credit limits for customers.
customers who should not receive credit in order to Credit limit criteria should be
earn the commission on the sale. determined by the company and
consistently applied.
4. All programmers have access to the accounting Access to the accounting records
software which could provide unauthorized should be restricted and
changes to the accounting records (such as wage protected with password or
rates). biometric restrictions.
5. Eliminating receiving reports and purchase orders Receiving reports and purchase
causes problems when invoices from suppliers are orders should be reinstated.
received. Accountants will not be able to verify if
the invoice pertains to items that have actually
been received or approved. Incorrect or fictitious
invoices may be paid or unauthorized orders made.

PROBLEM 7-4A
(a) Control Weaknesses (b) Improvements
The tickets were unnumbered so there is no Tickets should be prenumbered so

way of knowing if duplicates were made and that the students could be held more
sold. accountable for the tickets and a final
reconciliation could be performed
between cash receipts and sales.
No record was kept of which students took Roger should have kept a record of
tickets to sell or how many they took so there is which tickets were issued to each
no way of knowing if tickets were given away for student for resale. (Note: This problem
free and how many tickets were actually sold. could have been largely avoided if the
tickets had been sold at the door on
the day of the dance.)
There was no control over unsold tickets. This Students should have been required
deficiency made it possible for students to sell to return the unsold tickets to Roger
tickets, keep the cash, and tell Roger that they as well as the cash. In each case, the
had disposed of the unsold tickets. students should have been issued a
receipt for the cash they turned in and
the tickets they returned.
Did not receive a receipt from Obnoxious Al. A receipt should have been obtained
Without a receipt, there is no way to verify how from Obnoxious Al.
much Obnoxious Al was actually paid. For
example, it is possible that he was only paid
$100 and that Roger took the rest.
Inadequate control over the cash box. Only Roger should have had access
to the key and dispersed funds when
necessary for purchases.
Praveen Patel counted the funds, made out the Roger should have counted the funds,
deposit slip, and took the funds to the bank. with someone observing him. Then he
Praveen could have taken some of the money. could have made out the deposit slip
and had Praveen deposit the funds.

PROBLEM 7-4A (Continued)
(a) and (b) (Continued)
Students taking money for decorations were not Roger should reimburse each student
required to have a receipt and had unrestricted when a receipt is provided
access to the cash box to pay for their
purchases.
Sara Wu was collecting tickets and receiving There should have been one person
cash for additional tickets sold. selling tickets at the door and a second
person collecting tickets. The tickets
collected times the price per ticket
could then be compared to the cash
collected.
Net cash receipts were less than anticipated. A final reconciliation should have been
performed between cash on hand,
ticket sales and purchase receipts.

PROBLEM 7-5A
(a) BEAUPRÉLTD.
Bank Reconciliation
July 31
Cash balance per bank statement .............................................. $21,062
Less: Outstanding cheques ($1,844 – $1,378) .......................... $ 466

Deposit incorrectly posted by bank .................................. 1,800 2,266
Adjusted cash balance per bank................................................. $18,796
Cash balance per books ............................................................. $14,786

Add: EFT collections ................................................................. 4,110
18,896
Less: Bank service charges ....................................................... 100
Adjusted cash balance per books ............................................... $18,796
The salaries are not a reconciling item because they were recorded by both the bank
and the company.
(b) July 31 Cash ....................................................................... 4,110

Accounts Receivable ..................................... 4,110
31 Bank Charges Expense .......................................... 100

Cash .............................................................. 100

PROBLEM 7-6A
(a)
February 28, adjusted cash balance per bank reconciliation ... $13,103
Add: Cash receipts in March ................................................... 4,813
Less: Cash disbursements in March........................................ 3,375
March 31, unadjusted cash balance ........................................ $14,541
(b) Deposits in transit: $1,025 (dated March 31)
(c) Outstanding cheques: #3473 for $487(dated March 29)
(d)
YAP LTD.
Bank Reconciliation
March 31
Balance per bank statement ................................................. $12,287

Add: Deposits in transit [from (b)] ..................................... $1,025
Error in recording cheque #3472
($1,641 – $1,461) ................................................ 180 1,205
13,492
Less: Outstanding cheques
No. 3473 [from (c)]................................................... 487
Adjusted cash balance per bank........................................... $13,005
Balance per books [from (a)] ................................................ $14,541

Add: EFT collection—Boudreault ..................................... 230
14,771
Less: Service charges ($49 + $65) ................................... $ 114
NSF cheque and fee—Aubut ($550 + $40) ............. 590
EFT loan payment ................................................... 1,062 1,766
Adjusted cash balance.......................................................... $13,005

(e) Mar. 31 Cash .................................................................. 230

Accounts Receivable ................................. 230
31 Bank Charges Expense ..................................... 114

Cash .......................................................... 114
31 Accounts Receivable ......................................... 590

Cash .......................................................... 590
31 Bank Loan Payable ........................................... 1,000

Interest Expense ............................................... 62
Cash .......................................................... 1,062

PROBLEM 7-7A
(a)
October 31, adjusted cash balance per bank reconciliation................... $23,812
Add: Cash receipts in November ........................................................... 21,438
Less: Cash disbursements in November ............................................... 30,968
November 30, unadjusted cash balance................................................ $14,282
(b) HAMPTONS LIMITED

Bank Reconciliation
November 30
Balance per bank statement ........................................... $18,958

Add: Deposits in transit (Nov. 30 cash receipt) ............. 2,676
21,634
No. 2474 .......................................................... $1,008
No. 2480 .......................................................... 1,224
No. 2482 .......................................................... 1,660 3,892
Adjusted cash balance per bank..................................... $17,742
Balance per books [from (a)] .......................................... $14,282

Add: EFT collection .................................................... 5,008
19,290
Less: NSF cheque and fee ($500 + $80) ..................... $580
Bank service charges ......................................... 50
Error in recording cheque No. 2476
($4,760 – $5,660) .............................................. 900
Error in Nov. 20 deposit ($5,908– $5,890) ......... 18 1,548
Adjusted cash balance per books ................................... $17,742

(c) Nov. 30 Cash ........................................................................... 5,008

Notes Receivable ............................................... 4,400
Interest Revenue ................................................ 608
30 Bank Charges Expense .............................................. 50

Cash ................................................................... 50
30 Accounts Receivable (Giasson Developments) .......... 580

Cash ................................................................... 580
30 Accounts Payable ........................................................ 900

Cash .................................................................... 900
30 Accounts Receivable.................................................... 18
Cash .................................................................... 18

PROBLEM 7-8A
(a) and (b) Cash and cash equivalents (reported in Current Assets section)
Cash:
1. Cash on hand ............................................................... $ 5,000
2. Commercial bank savings account............................... 100,000
Commercial bank chequing account ............................ 25,000
US bank account (Canadian equivalent) ...................... 45,000
Total cash ............................................................................... 175,000
Cash equivalents:
5. Government of Canada Bond ...................................... 75,000
Total cash and cash equivalents ............................................. $250,000
(c) 3. Restricted cash would be reported as a current or non-current asset, depending

on the timing of the equipment replacement.
4. Amounts due from employees (travel advances) would be classified as other

receivables account called Advances to Employees.
5. Trading investments would be listed separately in the current assets section of

the statement of financial position and would include the term deposit which
matures in 120 days (to be a cash equivalent it would have to mature in 90 days
or less) and the shares of Shoppers Drug Mart. The classification of the shares
could also be non-current depending on management’s intentions for holding
the shares.
6. Unused postage stamps would be included in Supplies.
7. NSF cheques would be included in Accounts Receivable, assuming the

company expects collection. If collection is doubtful, they might be provided for
as part of Bad Debts Expense or written off as uncollectable.
8. This amount would be reported as restricted cash in the non-current assets

section of the statement of financial position.

PROBLEM 7-9A
(a) Cash includes cash on hand, including any debit and bank credit card slips, and
money in bank accounts.
Cash equivalents are short-term, highly liquid (easily sold) trading investments that
are subject to insignificant risk of changes in value less any bank overdrafts.
Examples of trading investments that would be classified as cash equivalents include
debt investments such as government treasury bills (T-bills) that mature in 90 days or
less, money market funds, and 90-day bank term deposits.
(b) Restricted cash will most likely be reported in the non-current assets section of the
statement of financial position as it can likely not be used to meet current liabilities.
(c) It is necessary to report restricted cash separately because of management’s intent in

the use of the cash. Since the cash cannot be used for regular operations and has
been set aside for a specific purpose, it is not available to settle liabilities whenever
these are due. Separate classification assists users of the statement of financial
position in assessing the flexibility available to the business in managing its cash and
obligations to pay cash.

PROBLEM 7-10A
Accelerating collection of receivables

- currently only a minimal deposit of $50 is received from the customers. Increase the
deposit to cover cost of decorations so that this money is received up front
- have final payment due immediately following the function
- both of these will improve cash flow as cash receipts will be accelerated
- Bev will have to check with other decorating companies to see what their terms are in
order to remain competitive
- if final payment cannot be received immediately due to competitive pressures, Bev
must monitor collection better and actively contact customers whose payments are
overdue so that cash can be collected more promptly
Delay payment of liabilities

- Bev can apply for credit which will delay payment by 30 days giving her use of this
cash for 30 more days

PROBLEM 7-1B
Control Activities Application to Cash Payments
Authorization of transactions Only the controller and assistant controller are

and activities authorized to sign cheques. Invoices are approved by
the purchasing agent and goods received are
approved by the receiving department supervisor.
Segregation of duties The purchasing agent has only an approval function

and does not work in the receiving or accounting
areas. The receiving department supervisor has
access to the assets but does not order or record
purchases. Payment can only be made by the
controller or assistant controller, and the cheque
signers do not record the cash disbursement
transactions. The bank reconciliation is not done by
someone who records payments.
Documentation Cheques are prenumbered.

Following payment, the invoices are stamped “PAID”.
Physical controls Blank cheques are kept in a safe in the controller’s

office. Only the controller and assistant controller
have access to the safe. A computer is used for
printing cheques.
Independent checks of The cheque signer compares the cheque with the
performance approved invoice prior to issue. A staff accountant
reconciles bank and book balances monthly.
Human resource controls None identified.

PROBLEM 7-2B
(a) The weaknesses in control activities in the handling of collections include:
• Each usher could take cash from the collection plates en route to the basement office.
• The head usher counts the cash alone so no one would ever know if the head usher
stole cash.
• The head usher’s notation of the count is left in the safe, with the cash so no other than
the financial secretary will know if the cash placed in the safe was ever deposited.
• The financial secretary counts the cash alone.
• The financial secretary withholds $200 per week – this is an unapproved payment.
• The cash is vulnerable to robbery when kept in the unlocked safe overnight.
• Cheques are made payable to “Cash” so anyone can cash them.
• The financial secretary has custody of the cash, maintains church records, and prepares
the bank reconciliation.
• No annual audits of cash receipts procedures are performed.
• The secretary is not bonded.
(b) The improvements should include the following:
(1) Head usher

• The head usher and a finance committee member should take the cash to the office.
The cash should be counted by the head usher and the financial secretary in the
presence of the finance committee member. The amount counted should be written
down on a cash count sheet and copies kept by the secretary and finance committee
member.
(2) Ushers
• The ushers should transfer their cash collections to a cash pouch (or bag) held by the
head usher. The transfer should be witnessed by a member of the finance
committee.

PROBLEM 7-2B (Continued)
(b) (Continued)
(3) Financial Secretary

• Following the count, the financial secretary should prepare a deposit slip in duplicate
for the total cash received, and the secretary should immediately deposit the cash in
the bank’s night deposit vault. A copy of the deposit slip should be given to a finance
committee member.
• A “petty” or small cash fund should be established for the financial secretary to be
used for weekly cash expenditures and requests for replenishment of the fund should
be sent to the chairperson of the finance committee for approval. Receipts for items
paid from this fund along with the unused cash should be kept in a locked cash box.
Periodic counts of the cash box should be performed by a finance committee
member to ensure that the cash on hand plus receipts for cash expenditures total the
limit (for example, $200) established for the fund.
(4) Finance Committee

• A reconciliation of the cash count sheet and the bank deposit slip should be done
every time a deposit is made to ensure all cash counted was actually deposited.
• Members should make their cheques payable to the church, and not to cash.
• The financial secretary should be bonded.
• At the end of each month, a member of the finance committee should prepare the
bank reconciliation.
• Annual audits should be performed.

PROBLEM 7-3B
(a) Control Weaknesses (b) Recommendations
1. Cash is collected and kept in the car. This Cash should be deposited in the bank
could result in theft. each day.
2. The person purchasing the merchandise is An independent person should verify the
the same person that verifies receipt of the receipt of goods. The purchaser should
goods and approves invoices for payment. approve bills for payment by the
Because this person is responsible for all controller.
activities related to purchasing, errors and
theft could occur.
3. All three cashiers use the same cash Each employee should use a separate
drawer. This could result in difficulty cash drawer.
establishing responsibility for errors.
4. The office manager opens the mail, Mail should be opened by someone not
deposits the cash and cheques and posts responsible for making the bank deposit.
the entry in the accounting records. This The bank deposit slip should be
could result in the office manager reconciled to the accounting records (and
depositing cheques into his/her own perhaps a list of cheques kept by the
account, taking the cash and not posting mail room) on a daily basis to ensure all
the entry for accounting purposes or cash received was deposited and
posting a debit to an expense rather than recorded. Cash payments from
cash. customers should also not be accepted
through the mail.
5. The sales staff provides the product to the All sales staff should be provided with a
customer for small orders, receive the cash set amount of product. Replacement
or cheques from the customers and restock product for product sold should only be
their own inventory. This could result in the provided to the sales staff by warehouse
sales staff keeping the payment from the personnel after the sales staff submits
customer and/or taking the product the money collected (cash or cheque) for
themselves. the product being replaced.

PROBLEM 7-4B
Bank statements are not being reviewed Bank statements should be reviewed on a
as is evidenced by the fact that the bank regular basis and all deposits on the
statements have not been opened. statement compared to accounting
records. As well, cheques should be
scrutinized to ensure they have been
recorded and written to valid vendors and
that appropriate endorsements
(signatures) have been provided.
Accounting records have not been An accounting system should be

created nor updated regularly. The lack implemented immediately and all
of accounting records means that the transactions recorded on a timely basis by
charity cannot meet its mandate of an individual who does not have
having financial records available for the responsibility over the collection or deposit
public to examine. Reconciliations of cash receipts and the authorization or
cannot be performed if there are no signing of cheques for cash
accounting records to compare to the disbursements.
bank statement. Finally, it is impossible
for the charity to know if its resources are
being spent on charitable activities if
there is no record of total cash receipts
maintained.
Receipts are only issued for amounts Prenumbered receipts should be issued
over $20. for all donations and reconciled by a
representative of the charity at the end of
the day to the actual cash collected.

(a) and (b) (Continued)
Collections are made by volunteers who This is a problem facing many charities
work on a short-term basis and one that cannot easily be solved. In
some cases, bonding of volunteers may
be an option. Some charities will screen
their volunteers for any criminal
background. However, the use of
prenumbered receipt books is often the
only available control.
Drivers collect cash. There is a The volunteer and the driver should count
possibility that the driver could all cash receipts at the end of the day. A
misappropriate cash and not report the reconciliation of the cash per the receipt
collection. books and the deposit should be prepared.
An independent person (not the driver)
should make the deposit daily. The
reconciliation should be sent back to the
charity’s head office to be used as a
source document to update the accounting
records.
The driver uses money from cash All cash receipts should be deposited
collections to pay expenses. This means intact. Cash disbursements should be by
that cash receipts, cash deposits and cheque only after appropriate approval
cash disbursements may not be has been obtained. A special cash fund,
recorded correctly. also known as a petty cash fund, could be
established to allow for smaller cash
disbursements.
Because no reconciliation was made of The dance tickets should have been
the cash receipts to the tickets printed for prenumbered and the numbers of tickets
the dance, there is a possibility that the taken by each volunteer recorded. Cash
tickets could have been sold by the receipts from the ticket sales should have
volunteers and the cash never remitted been reconciled to the tickets. Any unsold
to the charity. tickets should have been returned to the
charity and accounted for in the
reconciliation.

PROBLEM 7-5B
(a)
O’HEARNE LIMITED
Bank Reconciliation
May 31
Cash balance per bank statement ................................................. $15,230

Add: Deposit in transit ................................................................ $1,926
Bank error—O’Bearne cheque........................................... 1,200 3,126
18,356
Less: Outstanding cheques ($2,900 – $2,240 + $1,892) ............ 2,552
Adjusted cash balance per bank ................................................... $15,804
Cash balance per books ............................................................... $13,126

Add: EFT collections.................................................................. 4,188
17,314
Less: NSF cheque and service charge ($1,350 + $80)............... $1,430
Bank service charge ...................................................................... 80 1,510
Adjusted cash balance per books ................................................. $15,804
(b) May 31 Cash .................................................................... 4,188

Accounts Receivable ................................... 4,188
31 Accounts Receivable ........................................... 1,430

Cash ............................................................ 1,430
31 Bank Charges Expense ....................................... 80

Cash ............................................................ 80

PROBLEM 7-6B
(a)
April 30, adjusted cash balance per bank reconciliation .................... $ 9,213
Add: Cash receipts in May ................................................................. 4,307
Less: Cash disbursements in May ..................................................... 5,199
May 31, unadjusted cash balance ..................................................... $ 8,321
(b) Deposits in transit, May 31, $1,286 (dated May 31).
(c) Outstanding cheques #545 for $950
(d)
RIVER ADVENTURES LTD.
Bank Reconciliation
May 31
Balance per bank statement ............................................. $7,567

Add: Deposits in transit [from (b)] ................................... 1,286
8,853
No. 545 [from (c)]................................................. $950
Bank error cheque #543 ($1,650 – $1,560) ......... 90 1,040
Adjusted cash balance per bank....................................... $7,813
Balance per books [from (a)] ............................................ $8,321

Add: EFT collection ...................................................... 650
8,971
Less: Service charges ($75 + $25) ............................... $100
EFT insurance payment ...................................... 578
NSF cheque and fee ($440 + $40) ...................... 480 1,158
Adjusted cash balance...................................................... $7,813

(e) Cash ................................................................................. 650

Accounts Receivable................................................ 650
Accounts Receivable ........................................................ 480

Cash......................................................................... 480
Bank Charges Expense .................................................... 100

Cash......................................................................... 100
Prepaid Insurance ............................................................ 578

Cash......................................................................... 578

PROBLEM 7-7B
(a)
November 30, adjusted cash balance per bank reconciliation .......... $12,743
Add: Cash receipts in December ...................................................... 8,955
Less: Cash disbursements in December .......................................... 15,148
December 31, unadjusted cash balance........................................... $ 6,550
(b) RACINE LIMITED

Bank Reconciliation
December 31
Cash balance per bank statement ............................... $10,395

Add: Deposits in transit .............................................. 1,197
11,592
No. 3474 ....................................................... $1,050
No. 3478 ....................................................... 538
No. 3483 ....................................................... 1,390 2,978
Adjusted cash balance per bank.................................. $ 8,614
Cash balance per books [from (a)] .............................. $6,550

Add: EFT collection .................................................... 3,145
9,695
Less: NSF cheque and fee ($987 + $40) ................. $1,027
Bank service charges ..................................... 45
Error in Dec. 17 deposit ($2,954 – $2,945)..... 9 1,081
Adjusted cash balance per books ................................ $8,614

(c) Dec. 31 Cash ................................................................ 3,145

Accounts Receivable............................... 3,145
31 Accounts Receivable........................................ 1,027

Cash ........................................................ 1,027
31 Bank Charges Expense ................................... 45

Cash ........................................................ 45
31 Accounts Receivable........................................ 9
Cash ........................................................ 9

PROBLEM 7-8B
(a) and (b)
Cash:
1. Cash on hand ........................................................................ $ 1,600
2. Debit card slips ...................................................................... 500
3. MasterCard credit card slips .................................................. 975
4. Bank chequing account ......................................................... 7,460
7. US dollar account (Canadian equivalent) .............................. 2,241
Total cash balance ........................................................... 12,776
Cash equivalents:
5. Government of Ontario bond ................................................ 5,000
Cash and cash equivalents ........................................................... $17,776
(c) 6. The cash due from the customer should be recorded as an account receivable, and
reported as a current asset on the statement of financial position. The remainder of
the entry should update merchandise inventory (current asset), sales (revenue),
and cost of goods sold (expense).
8. The deposit with Hydro One should be recorded as an advance or deposit in the
current assets section of the statement of financial position as it is very similar to a
receivable that the company hopes to collect once the credit history is established.

PROBLEM 7-9B
(a) The security deposits were not included in cash and cash equivalents as these
amounts cannot be spent freely by the company to pay off current liabilities. They are
held in trust for the tenants and are therefore a form of restricted cash. They are
therefore segregated on the statement of financial position.
(b) Segregated tenant’s security deposits would most likely be classified in the non-
current assets section of the statement of financial position. Depending on the length
of the apartment leases to which the security deposits relate and the operating cycle of
the business, the timing of when the repayment of these deposits are not likely to be in
the current accounting cycle.

PROBLEM 7-10B
Accelerating collection of receivables

- Currently, no deposit is received from the customers and billing is done at the end of
the contract which is four months after the contract started
- Jackie should ask customers for a large upfront deposit before the items are
purchased on behalf of the customer.
- Jackie should also consider billing on a monthly basis throughout the contract so that
cash is received earlier
Delaying payment of liabilities

- Jackie is currently paying for items purchased immediately. She can apply for credit
and pay for the purchases on account, probably 30 days later than she is currently
paying

BYP 7-1 FINANCIAL REPORTING
(a) The second paragraph of the Management’s Responsibility for Financial Statements
clearly states that management is responsible for establishing and maintaining a proper
system of internal control. This statement is followed by a description of the limitations of
internal control, a general description of the purpose of internal control, and mention that
the internal auditors of the company perform a review and evaluation of internal controls
on management’s behalf.
In the Independent Auditor’s Report, the auditor considers the internal controls relevant to
the company’s preparation and fair presentation of the financial statements. Following this
study of internal controls, the auditor designs audit procedures that are appropriate under
the circumstances in order to express an opinion on the financial statements.
(b) Management has the primary responsibility for the system of internal control as indicated
in the answer to (a) above. The auditor points out in the second paragraph of the
Independent Auditor’s Report that management is responsible for internal control that will
enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error. The auditor is not responsible for the design
or effectiveness of internal controls and does not express an opinion as to their
effectiveness. Nonetheless, the auditor does consider the internal controls in the design of
their audit, as noted in (a) above.
(c) Management has the primary responsibility for the preparation and presentation of the
financial statements. This responsibility is mentioned in both reports. The very first
sentence of the Management’s Responsibility for Financial Statements states this
responsibility and then the auditor repeats the statement in the second paragraph of the
auditor’s report.

BYP 7-2 COMPARATIVE ANALYSIS
(a) Jean Coutu reports a negative balance of cash and cash equivalents of $(1.6) million at
March 2, 2013.
(b) At March 2, 2013, Jean Coutu reports a temporary investment of $20 million in the
current assets section of its statement of financial position and a bank overdraft
balance of $21.6 million in the current liabilities section. These two amounts net to the
$(1.6) million ($20 – $21.6) reported on its statement of cash flows.
(c) Shoppers Drug Mart reports a positive cash balance of $104,529 thousand, compared
to Jean Coutu’s negative cash and cash equivalents balance of $1.6 million. Shoppers
has the better cash position in the most recent year.

BYP 7-3 COMPARING IFRS AND ASPE
(a) Generally, which accounting standards a company follows should not have a
significant impact on its internal controls. However, since IFRS is more principles-
based and relies more upon professional judgment than ASPE, companies need to
have controls in place to assess decisions that have been made when making various
calculations. These types of controls would rely heavily upon review and approval.
(b) Strong internal controls are essential to proper recording of transactions and the
preparation of financial statements to ensure the usefulness of this information for
decision-making by external users. Publicly traded companies have more external
users of their financial statements than do private companies. By reporting on the
effectiveness of their internal controls over financial reporting, public companies
provide their stakeholders with important information on the quality of the process
used to produce the financial statements. Also, because management must prepare a
report, it must assess the effectiveness of controls on an ongoing basis. Many people
argue that this will help identify any weaknesses in the systems, as well as fraud and
error, on a timely basis.

BYP 7-4 CRITICAL THINKING CASE
(a) Vanessa should report several internal control weaknesses for the hotel operations to
her father Patrick Chen:
1. For the room rental portion of operations:

• The opportunity exists for unrecorded room rental revenues. Patrons who pay
cash may have access and use of the room but the revenue from the rental
remains unreported and the desk clerk pockets the cash collected.
• Friends can gain access to rooms and related services without any charges and
without any revenue to the hotel.
2. For bar revenues:

• The bartender has the opportunity to bring in inventory purchased personally
and resold at the bar, while keeping the cash receipts from sales.
• Revenue from bar sales may go unrecorded as the bartender is too busy to
enter sales in the cash register.
3. For parking lot revenues:

• The opportunity exists for the attendant to understate the amount of parking
revenue collected while pocketing the cash.
• Friends of the attendant may be allowed parking without having to pay any fees.
(b) It will not always be possible to establish how much money has been lost or stolen
from the hotel. While some errors or omissions can be measured, such as room
rentals, unrecorded liquor sales will be very difficult to measure since the liquor sold
may not have come from inventory purchased.
(c) A general recommendation concerning hiring family members applies in this case for
all of the hotel’s operations. Collusion between management and its employees to
defraud the hotel is heightened when the employees are members of the general
manager’s family. In addition, the following steps can be taken to avoid the possibility
of fraud in the future:
1. For the room rental portion of operations:

• A daily reconciliation should be prepared by someone other than the desk
clerk which compares the report for the number rooms cleaned to the
number of room rented.

BYP 7-4 (Continued)
(c) (Continued)
2. For bar revenues:

• A division of duty should be established between the person having
access to inventory and the person handling cash receipts.
• Supervision of the handing of the inventory and the handling of the cash
should be done whenever possible. Any change in the normal procedures,
such as was the case in the handling of the tequila should be cause for
termination.
• A daily check for the reasonableness of the amount of revenues reported
from bar sales should be made to the inventory consumed.
3. For parking lot revenues:

• Install the automated payment system which will remove the attendant’s
opportunity to understate revenues and pocket cash.

BYP 7-5 ETHICS CASE
(a) The stakeholders are the customers affected by the policy, the shareholders of the banks
who want to see higher profits and the management of the banks who make the decisions
regarding fees and cheque processing policies.
(b) (1) If the bank processes cheque #3158 for $1,510 first it will bounce due to non-
sufficient funds as the balance in the account is only $1,500. All of the other
cheques to be processed after that will also bounce so consequently all 5 cheques
will bounce and the total NSF processing fees charged by the bank will be $225 (5
× $45).
(2) If the bank processes the smallest cheques first, all of the cheques will clear
processing except for the largest cheque which is cheque #3158 for $1,510. By
processing the cheques in this way, only one cheque will bounce and this means
that the bank will earn a processing fee of only $45.
(c) Whether this is ethical is subject to debate. On the one hand, it can be argued that
customers have a responsibility to maintain an adequate balance in their accounts. Some
customers are frequently overdrawn; thus only severe penalties will persuade them to
maintain an adequate balance. However, it could also be argued that processing cheques
from largest to smallest is “gouging” and takes unfair advantage of the customer.
(d) In deciding what approach to take, the bank must consider its relationship with the
customer. For customers who do not write NSF cheques frequently, it probably does not
matter which approach is taken. Any customer that is frequently overdrawn may not be the
type of customer that the bank is willing to deal with over the long term so it may be
beneficial to other account holders to treat those who are always overdrawn as severely
as possible. If the “largest to smallest” policy is used by all banks, customers won’t gain an
advantage by switching accounts to other banks if this policy angers them.
(e) Answer will vary depending on students’ opinions.

BYP 7-6 “ALL ABOUT YOU” ACTIVITY
Note to instructors: Answers will vary based on individual student experiences.
(a)
Here is the information that the website will generate assuming a student is attending the
University of Calgary and studying business.
Calculate your school tuition cost
Select the Alberta Alberta AB

province where
you will attend
school:
Select a school: University of Calgary University of Cal 48005000
Select a Business, Mgt and Public Administration Business, Mgt a 7697

degree:
Select degree 4 years

length:
Year 1 ($) Year 2 ($) Year 3 ($) Year 4 ($)

Tuition 7697 7697 7697 7697
Books 1,500 1,500 1,500 1,500
Room/rent 5,394 5,394 5,394 5,394
Food 3,347 3,347 3,347 3,347
Entertainment 1,600 1,600 1,600 1,600
Transportation 880 880 880 880
Other 0 0 0 0
Total 20418 20418 20418 20418
Adapted from Statistics Canada Survey of Tuition and Living Accommodation Costs for Full-time Students at
Canadian Degree-granting Institutions (TLAC), 2012 � 2013

BYP7-6 (Continued)
(b)
Here is an example of where the funding for a student’s education may come from using the
tool provided.
How will you pay for school?
Enter any additional money that you will use to pay for your education.
Fields on this tab allow you to enter annual amounts, which are then multiplied by the number of years in your program. If
you have a one-time funding source (such as a bursary or scholarship), you should divide the total amount of funding by the
number of years in your program to avoid overstating your funding. For example, if you get a first-year entrance scholarship
of $1,000 for your 4-year program, and you do not expect to receive the same amount every year, enter $250 for this
scholarship ($1,000/4 years).
Scholarships & $ 5,000 per year Gifts and $ 1,000 per

bursaries: family's year
contributions:
Earnings from $ 0 per year Education $ 2,500 per

your savings plan: year
job (after tax):
Personal $ 5,000 per year Other: $ 0 per

savings: year
Total cost of university
According to the above current plan, total education costs of $81,672 ($20,418 × 4 years) will
be offset by $54,000 ($13,500 × 4 years) in funding.

BYP 7-7 SERIAL CASE
Note to instructors: All of the material supplementing this group activity, including a
suggested solution, can be found in the Collaborative Learning section of the Instructor
Resource site accompanying this textbook as well as in the Prepare and Present section of
WileyPLUS.
(a) The strengths in Koebel’s system of internal control and related control activity are as
follows:
Strength Control Activity
1. Password access to the cash register Physical controls
Cash register calculates the pricing of the Documentation

goods and prints receipt
2. Cash is deposited daily Physical controls
Owners are involved in the reconciliation of Independent checks of

cash with totals from the cash register performance
3. Inventory is counted daily Independent checks of
performance
4. Invoices are prepared when the shipment of Documentation
cupcakes is complete
5. The monthly payroll schedule is reconciled to Independent checks of
actual salaries paid performance
6. Janet or Brian authorize the purchase of Authorization of transactions
inventory

BYP 7-7 (Continued)
(b) The weaknesses in Koebel’s system of internal control and the control activities violated
are as follows:
Weaknesses Control Activity
1. Employees share one cash register and Authorization of transactions and

management currently is unable to affix activities
responsibility for cash to a specific employee
Cashier is handling cash and inventory Segregation of duties
Entering transactions can be performed by Physical controls

incorrect cashier, due to no logging off
No mention if employees are bonded Human resource controls
No mention of supervision of employees Segregation of duties

entering sales and handling inventory
No mention of procedures for voided Authorization of transactions and
transactions or pricing adjustments on sales activities

BYP 7-7 (Continued)
(b) (Continued)
Weaknesses Control Activity
2. Reconciliation of sales is not done daily and so Independent checks of

one cannot establish who has made an error performance
on a sale
3. Inventory is counted daily to determine what Independent checks of
product is needed for the next day, but should performance
also be used to determine unrecorded sales
4. Documentation of authorized overtime is not Documentation
obtained
5. Invoices are not prenumbered Documentation
Invoices are not issued in duplicate - Documentation
photocopies have to be made and if staff forget
to make a photocopy, sales could go
unrecorded
Invoices are manually prepared, leading to Independent checks of
possible pricing or calculation errors performance
6. No system in place to avoid duplication of Independent checks of
purchases performance
In order to address the weaknesses, improvements that Koebel’s Family Bakery should
consider include:
1. Program the cash register such that a new transaction cannot be entered without the
operator logging off from the previous transaction.
2. Reconcile the sales to the deposit daily and establish the responsibility of errors to the
particular employee causing the error.
3. Consider bonding the employees handling cash.
4. Provide supervision of employees or install cameras to ensure that all sales are
recorded.
5. Design procedures involving owners for the voiding or altering the pricing for
transactions entered.
6. Compare and reconcile the reduction of inventory to the sales recorded daily.
7. Implement the use of pre-numbered invoices that are printed induplicate carbon copies
which cannot be altered.
8. Account for the numerical sequence of invoices.
9. Consider automating the production of invoices.
10. Install a log of purchase orders made to avoid duplication of orders.

Legal Notice
Copyright
Copyright © 2014 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
The data contained in these files are protected by copyright. This manual is furnished under
licence and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval
system, modified, made available on a network, used to create derivative works, or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording,
scanning, or otherwise without the prior written permission of John Wiley & Sons Canada,
Ltd.
(MMXIII xi FI)


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ASSIGNMENT CLASSIFICATION TABLE

1. Describe the 1, 2, 3, 4, 1, 2, 3, 4 1, 2, 3, 4 1A, 2A, 1B, 2B, 1, 3, 4,

2. Apply key control 7, 8, 9, 10, 3, 4 3, 4 1A, 2A, 1B, 2B, 4, 7

3. Prepare a bank 12, 13, 14, 5, 6, 7, 8, 5, 6, 7, 8 5A, 6A, 7A 5B, 6B, 5

Solutions Manual 7-1 Chapter 7

ASSIGNMENT CHARACTERISTICS TABLE

Problem Difficulty Time

1A Identify control activities over cash receipts. Simple 20-30

2A Identify control weaknesses over cash payments. Simple 20-30

3A Identify control weaknesses. Moderate 30-40

4A Identify control weaknesses over cash receipts and Complex 40-50

5A Prepare bank reconciliation and adjusting entries. Moderate 30-40

6A Prepare bank reconciliation and adjusting entries. Moderate 40-50

7A Prepare bank reconciliation and adjusting entries. Moderate 40-50

8A Calculate cash. Moderate 15-20

9A Discuss reporting of cash. Simple 15-20

10A Recommend cash management improvements. Moderate 20-30

1B Identify control activities over cash payments. Simple 20-30

2B Identify control weaknesses over cash receipts. Simple 20-30

3B Identify control weakness. Moderate 30-40

4B Identify control weaknesses over cash receipts and Complex 40-50

5B Prepare bank reconciliation and adjusting entries. Moderate 30-40

6B Prepare bank reconciliation and adjusting entries. Moderate 40-50

7B Prepare bank reconciliation and adjusting entries. Moderate 40-50

8B Calculate cash. Moderate 15-20

9B Discuss reporting of cash. Simple 15-20

11B Recommend cash management improvements. Moderate 20-30

Solutions Manual 7-2 Chapter 7

3. Documentation procedures contribute to good internal control by providing evidence of

Solutions Manual 7-3 Chapter 7

Answers to Questions (Continued)

Solutions Manual 7-4 Chapter 7

Answers to Questions (Continued)

Solutions Manual 7-5 Chapter 7

Answers to Questions (Continued)

Solutions Manual 7-6 Chapter 7

SOLUTIONS TO BRIEF EXERCISES

Control Activity Example

Segregation of duties Tickets are provided to those entering the garage by an

Documentation The time on the ticket is entered into a machine to

Physical controls Cash is kept in a cash register.

Independent checks of performance If a customer is overcharged, they will complain.

BRIEF EXERCISE 7-2

(a) 3 All transactions should include original, detailed receipts.

Solutions Manual 7-7 Chapter 7

BRIEF EXERCISE 7-3

1. Documentation and physical controls

BRIEF EXERCISE 7-4

BRIEF EXERCISE 7-5

BRIEF EXERCISE 7-6

January deposits in transit:

Deposits in transit at beginning of month........................................................ $ 0

February deposits in transit:

Deposits in transit at beginning of month........................................................ $1,000

Solutions Manual 7-8 Chapter 7

BRIEF EXERCISE 7-7

November outstanding cheques:

Outstanding cheques at beginning of month .................................................. $ 0

December outstanding deposits:

Outstanding cheques at beginning of month .................................................. $1,500

BRIEF EXERCISE 7-8

(b) Accounts Payable ..................................................................... 18

BRIEF EXERCISE 7-9