Chapter 7 Sarbanes-Oxley, Internal Control, and Cash 335A former chairman, CFO, and controller of Donnkenny, an apparel company that makes
sportswear for Pierre Cardin and Victoria Jones, pleaded guilty to financial statement fraud.
These managers used false journal entries to record fictitious sales, hid inventory in public ware-
houses so that it could be recorded as “sold,” and required sales orders to be backdated so that
the sale could be moved back to an earlier period. The combined effect of these actions caused
$25 million out of $40 million in quarterly sales to be phony.a. Why might control procedures listed in this chapter be insufficient in stopping this type
of fraud?
b. How could this type of fraud be stopped?The procedures used for over-the-counter receipts are as follows. At the close of each day’s busi-
ness, the sales clerks count the cash in their respective cash drawers, after which they determine
the amount recorded by the cash register and prepare the memorandum cash form, noting any
discrepancies. An employee from the cashier’s office counts the cash, compares the total with
the memorandum, and takes the cash to the cashier’s office.a. Indicate the weak link in internal control.
b. How can the weakness be corrected?Deana Crisman works at the drive-through window of Awesome Burgers. Occasionally, when
a drive-through customer orders, Deana fills the order and pockets the customer’s money. She
does not ring up the order on the cash register.
Identify the internal control weaknesses that exist at Awesome Burgers, and discuss what
can be done to prevent this theft.The mailroom employees send all remittances and remittance advices to the cashier. The cashier
deposits the cash in the bank and forwards the remittance advices and duplicate deposit slips
to the Accounting Department.
a. Indicate the weak link in internal control in the handling of cash receipts.
b. How can the weakness be corrected?The actual cash received from cash sales was $17,572.40, and the amount indicated by the cash
register total was $17,589.65. Journalize the entry to record the cash receipts and cash sales.The actual cash received from cash sales was $6,973.60, and the amount indicated by the cash
register total was $6,932.15. Journalize the entry to record the cash receipts and cash sales.Migraine Co. is a medium-size merchandising company. An investigation revealed that in spite
of a sufficient bank balance, a significant amount of available cash discounts had been lost be-
cause of failure to make timely payments. In addition, it was discovered that the invoices for
several purchases had been paid twice.
Outline procedures for the payment of vendors’ invoices, so that the possibilities of losing
available cash discounts and of paying an invoice a second time will be minimized.Exercise 7-8
Financial statement fraud
Goals2, 3
Exercise 7-9
Internal control of cash receipts
Goals2, 3
Exercise 7-10
Internal control of cash receipts
Goals1, 2, 3
Exercise 7-11
Internal control of cash receipts
Goals2, 3
Exercise 7-12
Entry for cash sales; cash short
Goals2, 3
Exercise 7-13
Entry for cash sales; cash over
Goals2, 3
Exercise 7-14
Internal control of cash
payments
Goals2, 3