Chapter 7 Sarbanes-Oxley, Internal Control, and Cash 333Using the http://www.google.comAdvanced Search feature, enter “Sarbanes-Oxley” and click
on Google Search. Click on “Summary of Sarbanes-Oxley Act of 2002” that appears as part of
the aipca.org Web site. Scan the summary of the act and read Section 404. What does Section 404
require of management’s internal control report?Barbara Holmes has recently been hired as the manager of Fresh Start Coffee. Fresh Start Coffee
is a national chain of franchised coffee shops. During her first month as store manager, Barbara
encountered the following internal control situations:a. Fresh Start Coffee has one cash register. Prior to Barbara’s joining the coffee shop, each
employee working on a shift would take a customer order, accept payment, and then pre-
pare the order. Barbara made one employee on each shift responsible for taking orders
and accepting the customer’s payment. Other employees prepare the orders.
b. Since only one employee uses the cash register, that employee is responsible for counting
the cash at the end of the shift and verifying that the cash in the drawer matches the
amount of cash sales recorded by the cash register. Barbara expects each cashier to bal-
ance the drawer to the penny everytime—no exceptions.
c. Barbara caught an employee putting a box of 100 single-serving tea bags in his car. Not
wanting to create a scene, Barbara smiled and said. “I don’t think you’re putting those tea
bags on the right shelf. Don’t they belong inside the coffee shop?” The employee returned
the tea bags to the stockroom.State whether you agree or disagree with Barbara’s method of handling each situation and
explain your answer.Elegance by Elaine is a retail store specializing in women’s clothing. The store has established a
liberal return policy for the holiday season in order to encourage gift purchases. Any item pur-
chased during November and December may be returned through January 31, with a receipt,
for cash or exchange. If the customer does not have a receipt, cash will still be refunded for any
item under $50. If the item is more than $50, a check is mailed to the customer.
Whenever an item is returned, a store clerk completes a return slip, which the customer
signs. The return slip is placed in a special box. The store manager visits the return counter ap-
proximately once every two hours to authorize the return slips. Clerks are instructed to place
the returned merchandise on the proper rack on the selling floor as soon as possible.accounts in the names of the fictitious companies and
cashed the checks at a local bank. Describe a control pro-
cedure that would have prevented or detected the fraud.- Before a voucher for the purchase of merchandise is ap-
proved for payment, supporting documents should be
compared to verify the accuracy of the liability. Give an
example of a supporting document for the purchase of
merchandise. - The accounting clerk pays all obligations by prenum-
bered checks. What are the strengths and weaknesses in
the internal control over cash payments in this situation? - The balance of Cash is likely to differ from the bank state-
ment balance. What two factors are likely to be responsi-
ble for the difference?
14. What is the purpose of preparing a bank reconciliation?
15. Do items reported as credits on the bank statement rep-
resent (a) additions made by the bank to the company’s
balance or (b) deductions made by the bank from the
company’s balance? Explain.
16. Spectacle Inc. has a petty cash fund of $2,000. (a) Since
the petty cash fund is only $2,000, should Spectacle Inc.
implement controls over petty cash? (b) What controls, if
any, could be used for the petty cash fund?
17. (a) How are cash equivalents reported in the financial
statements? (b) What are some examples of cash equiv-
alents?
EXERCISES
Exercise 7-1
Sarbanes-Oxley internal con-
trol report
Goal 1
Exercise 7-2
Internal controls
Goals2, 3
Exercise 7-3
Internal controls
Goals2, 3