Solutions Chapter 7 - ANSWERS TO QUESTIONS 1 2 Disagree...

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ANSWERS TO QUESTIONS 1. Disagree. Internal control is also concerned with the safeguarding of company assets from employee theft, robbery, and unauthorized use. 2. The Sarbanes-Oxley Act requires that a company develop sound principles of control over financial reporting and continually verify that these controls are working. The act specifically requires top management to attest that the company’s internal controls are reliable and effective. In order to achieve and maintain the required level of control, all employees must be educated with regard to internal control principles and evaluated for compliance with expected procedures on a regular basis. 3. The principles of internal control are: (a) establishment of responsibility, (b) segregation of duties, (c) documentation procedures, (d) physical, mechanical, and electronic controls, (e) independent internal verification, and (f) other controls. 4. This is a violation of the internal control principle of establishing responsibility. In this case, each sales clerk should have a separate cash register or cash register drawer. 5. The two applications of segregation of duties are: (1) The responsibility for related activities should be assigned to different individuals. (2) The responsibility for record keeping for an asset should be separate from the physical custody of that asset. 6. 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 accounting contributes to recording transactions in the proper period, and the pre-numbering of documents helps to ensure that a transaction is not recorded more than once or not at all. 7. Physical controls include safes, vaults, and locked warehouses. These controls contribute to the safeguarding of company assets. Mechanical and electronic controls include cash registers and computerized accounting equipment that contribute to the accuracy and reliability of the accounting records, and electronic burglary systems and sensors that help to safeguard assets. 8. (a) Independent internal verification involves the review, comparison, and reconciliation of data prepared by employees. (b) Maximum benefit is obtained from independent internal verification when: (1) The verification is made periodically or on a surprise basis. (2) The verification is done by an employee who is independent of the personnel responsible for the information. (3) Discrepancies and exceptions are reported to a management level that can take appropriate corrective action. 9. (a) The concept of reasonable assurance means that the costs of establishing control procedures should not exceed their expected benefit. Ordinarily, a system of
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internal control provides reasonable but not absolute assurance, since absolute assurance would be too costly. (b)
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This note was uploaded on 03/01/2010 for the course ACCT 2301 taught by Professor White during the Spring '08 term at Central Texas College.

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Solutions Chapter 7 - ANSWERS TO QUESTIONS 1 2 Disagree...

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