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Chapter 7: Fraud, Internal Control, and Cash

Exercise
1. Explain theoretical foundations of fraud
Fraud experts often say that there are three primary factors that contribute
to rule-breaking behaviour of employees. Explain the three determining
factors of rule-breaking opportunistic behaviour according to Nooteboom
(1996).

2. Identify internal control principles

Fachbereich Elektrische
Energietechnik

The internal control procedures in Edmiston Company make the following


provisions. Identify the principles of internal control that are being followed
in each case.

Prof. Dr. Valerie Wulfhorst

a) Employees who have physical custody of assets do not have access to


the accounting records
b) Each month, the assets on h and are compared to the accounting
records by an internal auditor.
c) A prenumbered shipping document is prepared for each shipment of the
goods to customers.

3. Identify the internal control principles applicable to cash


receipts

Betriebswirtschaftslehre,
insb. Controlling
Telefon
02921 378-451
Telefax
02921 378-409
E-Mail
v.wulfhorst@fh-swf.de

Standort Soest
Lbecker Ring 2
59494 Soest

Halleran Company has the following internal control procedures over cash
receipts. Identify the internal control principle that is applicable to each
procedure.
a)
b)
c)
d)

All over-the-counter receipts are entered in cash registers.


All cashiers are bonded.
Daily cash counts are made by cashier department supervisors.
The duties of receiving cash, recording cash, and having custody of
cash are assigned to different individuals.
e) Only cashiers may operate cash registers.

Fachhochschule
Sdwestfalen
Sitz: Iserlohn

Hagen
Iserlohn
Meschede
Soest
www.fh-swf.de

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4. Identify the internal control principles applicable to cash


disbursements
Catt Company has the following internal control procedures over cash
disbursement. Identify the internal control principle that is applicable to
each procedure.
a)
b)
c)
d)
e)

Company checks are prenumbered.


The bank statement is reconciled monthly by an internal auditor.
Blank Checks are stored in a safe in the treasurers office.
Only the treasurer or assistant treasurer may sign checks.
Check-signers are not allowed to record cash disbursement
transactions.

5. Prepare entry to replenish a petty cash fund


On March 20, Garbers petty cash fund of $100 is replenished when the
fund contains $19 in cash and receipts for postage $40, supplies $26, and
travel expense $15. Prepare the journal entry to record the replenishment
of the petty cash fund.

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