ANSWERSSSS - E 4-1 1 Cash is important not because of its...

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E 4-1 1. Cash is important not because of its amount as reported on the balance sheet, but because of its effect on a business. All transactions ultimately affect cash. Businesses purchase assets and must pay cash. They make sales and collect cash. All expenses ultimately require cash. Also, cash is susceptible to theft because it is a medium of exchange. These factors combine to give cash more importance than its account balance would suggest. 2. Cancelling supporting documents reduces the opportunity for fraud. Without this control procedure, a dishonest employee could resubmit documents for payment a second time. The employee could change the payee’s address and have the check sent to an address the employee controls. Or the employee could arrange to have the second payee split the payment with the employee. Canceling the documents makes it difficult to get approval for duplicate payment. 3. Managers are concerned about safeguarding assets because businesses cannot operate without assets. Auditors are more concerned about the quality of the accounting records because auditors must rely on accounting records. If the records are reliable, auditors can limit their work and reduce the cost of the audit. 4. Separation of duties limits the chances for fraud (loss of assets) and also promotes the accuracy of the accounting records. This allows managers to rely on the accounting records to produce information useful for operating the business. E 4-2 The missing internal control characteristic in each situation is: a. Other controls (not depositing cash frequently enough for adequate security). b. Separation of duties (same person ordering merchandise and approving payment). c. Separation of duties (same person selling tickets and taking tickets). d. Supervision of employees (no one supervises the “Suspense” accountant). e. Documents and records (no receiving report). E 4-3 Cash Receipts: a. Weak internal control. The accountant both handles cash and accounts for cash. b. Strong internal control. There is a good separation of duties. Different people handle cash and account for cash.
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Equipment Purchases: a. Strong internal control. There is a good separation of duties. Supervisors request equipment, and the home office purchases the equipment. b. Weak internal control. Supervisors both request, purchase, and pay for equipment with little oversight by the home office. E 4-4
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This note was uploaded on 04/09/2008 for the course BUSS 101 taught by Professor Stefeni during the Spring '08 term at Worcester.

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ANSWERSSSS - E 4-1 1 Cash is important not because of its...

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