END OF CHAPTER MATERIAL

CONCEPT CHECK

1. 1. Which of the following is not part of an administrative process?
   1. The sale of stock
   2. The sale of bonds
   3. The write-off of bad debts
   4. The purchase of marketable securities
2. 2. Which of the following statements is not true regarding source of capital transactions?
   1. These processes should not be initiated unless there is specific authorization by management at a top level.
   2. Source of capital processes will result in potential dividend or interest payments.
   3. Retirement of debt is a source of capital process.
   4. The fact that these transactions and processes cannot occur without oversight by top management means other controls are not necessary.
3. 3. The officer within a corporation that usually has oversight responsibility for investment processes is the
   1. controller
   2. treasurer
   3. chief executive officer (CEO)
   4. chief accounting officer (CAO)
4. 4. Which of the following statements is not true regarding internal controls of capital and investment processes?
   1. Internal controls aimed at preventing and detecting employee fraud in capital and investment processes are not as effective.
   2. Top management fraud, rather than employee fraud, is more likely to occur.
   3. Any fraud is likely to involve manipulating capital and investment processes.
   4. Because of top management oversight, the auditor need not review these processes.
5. 5. Which of the following statements is true?
   1. Routine transactions are recorded in the general journal.
   2. Nonroutine transactions are entered in the general journal.
   3. Nonroutine transactions are recorded in a subsidiary ledger.
   4. Nonroutine transactions are recorded in a special journal.
6. 6. Regarding subsidiary ledgers and general ledger control accounts, which of the following is not true?
   1. Total balances in a subsidiary ledger should always equal the balance in the corresponding general ledger account.
   2. The general ledger maintains details of subaccounts.
   3. Control is enhanced by separating the subsidiary ledger from the general ledger.
   4. Reconciling a subsidiary ledger to the general ledger can help to detect errors or fraud.
7. 7. Which of the following statements regarding the authorization of general ledger posting is not true?
   1. Posting to the general ledger always requires specific authorization.
   2. User IDs and passwords can serve as authorization to post transactions to the general ledger.
   3. A journal voucher serves as authorization for manual systems.
   4. As IT systems become more automated, the authorization of general ledger posting is moved to lower levels of employees.
8. 8. In a manual system with proper segregation of duties, an employee in the general ledger department should only
   1. authorize posting to the general ledger
   2. post transactions to the general ledger
   3. reconcile the subsidiary ledger to the general ledger
   4. post transactions to the subsidiary ledger
9. 9. Which of the following statements about reporting is true?
   1. External users need detailed, rather than summarized, information.
   2. All reports, internal and external, are derived only from general ledger data.
   3. All organizations need similar internal reports.
   4. Internal reports are tailored to the specific needs of each management level and function.
10. 10. Which of the following is not typically an area of measure in a balanced scorecard?
    1. Vendor
    2. Customer
    3. Financial
    4. Learning and growth

DISCUSSION QUESTIONS

1. 11. (SO 1) What characteristics of administrative processes are different from the characteristics of revenue, expenditures, or conversion processes?
2. 12. (SO 1) How do other processes (revenue, expenditures, conversion) affect the general ledger?
3. 13. (SO 2) How would you describe capital?
4. 14. (SO 2) Describe the nature of the authorization of source of capital processes.
5. 15. (SO 2) How does the specific authorization and management oversight of source of capital processes affect internal controls?
6. 16. (SO 3) Describe when an organization would have a need to undertake investment processes.
7. 17. (SO 3) Why is the monitoring of funds flow an important underlying part of investment processes?
8. 18. (SO 3) How are IT systems potentially useful in monitoring funds flow?
9. 19. (SO 4) Explain how cash resulting from source of capital processes may be handled differently than cash in revenue processes.
10. 20. (SO 4) What advantages would motivate management to conduct fraud related to source of capital processes?
11. 21. (SO 4) Why are internal controls less effective in capital and investment processes?
12. 22. (SO 5) How is a special journal different from a general journal?
13. 23. (SO 5) How is a subsidiary ledger different from a general ledger?
14. 24. (SO 5) In what way are subsidiary ledgers and special journals replicated in accounting software?
15. 25. (SO 6) Within accounting software systems, what is the purpose of limiting the number of employees authorized to post to the general ledger?
16. 26. (SO 6) In a complex IT system, how may a customer actually authorize a sale?
17. 27. (SO 6) To properly segregate duties, what are the three functions that general ledger employees should not do?
18. 28. (SO 6) In an IT accounting system, which IT controls ensure the security of the general ledger?
19. 29. (SO 7) Describe the nature of reports for external users.
20. 30. (SO 7) Does the general ledger provide all information necessary for internal reports?
21. 31. (SO 7) How would operational internal reports differ from financial internal reports?
22. 32. (SO 7) How does time horizon affect the type of information in internal reports?
23. 33. (SO 8) Why are managers, rather than employees, more likely to engage in unethical behavior in capital and investment processes?
24. 34. (SO 8) How do processes with large volumes of transactions make fraudulent behavior easier?
25. 35. (SO 8) Explain the importance of full disclosure in source of capital processes.

BRIEF EXERCISES

1. 36. (SO 2) Describe the steps in source of capital processes and explain how top management is involved.
2. 37. (SO 3) Describe the steps in investment processes and explain how top management is involved.
3. 38. (SO 4) Explain the internal control environment of source of capital and investment processes.
4. 39. (SO 5) Describe the steps in a manual accounting cycle.
5. 40. (SO 6) Describe why there may be two authorizations related to revenue, expenditures, and conversion processes before they are posted to the general ledger.
6. 41. (SO 7) For each report shown, indicate in the appropriate column whether the report is likely to be for internal or external users (some reports may be both), and whether data would come exclusively from the general ledger.

   

PROBLEMS

1. 42 (SO 1,2) Compare source of capital processes with sales processes in terms of
   1. the frequency of transactions
   2. the volume of transactions
   3. the magnitude in dollars of a single transaction
   4. the manner of authorization
2. 43. (SO 1,3) Compare investment processes with sales processes in terms of
   1. the frequency of transactions
   2. the volume of transactions
   3. the magnitude in dollars of a single transaction
   4. the manner of authorization
3. 44. (SO 5) Exhibit 12-9 shows a screen capture from Microsoft Dynamics^® accounting software. The following modules in Dynamics GP^® are shown:
   • Financial
   • Sales
   • Purchasing
   • Inventory
   • Payroll
   • Manufacturing
   • Fixed Assets

   For each of the following transactions listed, explain which module you would choose and why:

   1. Entering an invoice received from a supplier
   2. Entering the receiving of materials at the shipping dock
   3. Entering a check received in payment of an account receivable
   4. Posting a batch of sales invoices to the general ledger
   5. Entering hours worked by employees
   6. Printing checks for suppliers

CASE

1. 45. (SO 6) Enderle Sound, Inc. (ESI), is a manufacturer of stereo speaker systems. The company prepares special journals and subsidiary ledgers for its revenue, expenditures, payroll, and conversion processes. For administrative processes, however, journal vouchers are created for the related general ledger entries. Stefan Bolling is the accounting clerk who has responsibility for preparing journal vouchers.

Journal vouchers are prepared on preprinted forms; however, these forms are not prenumbered. Stefan records a sequential journal voucher number on each form that is prepared. This procedure is in place because of the large number of journal vouchers that are typically voided each period at ESI. Because of the nonrouting nature of the underlying processes, it is not unusual for a journal entry to be revised once or twice before it is actually recorded.

Journal vouchers are posted to the general ledger on a biweekly basis. Once a journal voucher has been posted, Stefan records it in a voucher log. This log is simply a chronological listing of all journal vouchers written that allows Stefan to account for the numerical sequence of vouchers.

On a bimonthly basis, Stefan reconciles the subsidiary accounts to their control accounts in the general ledger and verifies that the general ledger is in balance.

Required:

Describe the internal control strengths and weaknesses of ESI's general ledger accounting processes. For any weaknesses, suggest an improvement.

CONTINUING CASE: ROBATELLI'S PIZZERIA

Reread the continuing case on Robatelli's Pizzeria at the end of Chapter 1. Consider any issues related to Robatelli's administrative and general ledger processes, and then answer the following questions:

1. Refer to the process map showing accounting cycle processes in Exhibit 12-5. Which typical special journals and subsidiary ledgers would be needed at Robatelli's? Which ones would not be needed and why?
2. How do the daily close procedures and summarizations that are the responsibility of Robatelli's restaurant managers fit into the company's overall accounting cycle process? Use information from this chapter to describe Robatelli's general ledger processes.

SOLUTIONS TO CONCEPT CHECK

1. (SO 1) The following is not part of an administrative process: c. The write-off of bad debts. The write-off of bad debts occurs within revenue processes.
2. (SO 2) The following statement is not true regarding source of capital transactions: d. The fact that these transactions and processes cannot occur without oversight by top management means other controls are not necessary. Management oversight is an important internal control, but it does not negate the need for other controls.
3. (SO 3) The officer within a corporation that usually has oversight responsibility for investment processes is the b. treasurer. The treasurer is normally the officer with oversight and decision authority for investment processes.
4. (SO 4) The following statement is not true regarding internal controls of capital and investment processes: b. Because of top management oversight, the auditor need not review these processes. Even with top management oversight, it is still important for auditors to review these transactions.
5. (SO 5) The following statement is true: b. Nonroutine transactions are entered in the general journal. Routine transactions are initially posted to special journals and subsidiary ledgers. Nonroutine transactions are initially recorded in the general journal.
6. (SO 5) Regarding subsidiary ledgers and general ledger control accounts, the following is not true: b. The general ledger maintains details of subaccounts. Subsidiary ledgers maintain details of accounts, such as accounts for each customer in the accounts receivable subsidiary ledger.
7. (SO 6) The following statement regarding the authorization of general ledger posting is not true: a. Posting to the general ledger always requires specific authorization. Especially in IT systems, general authorization is given to certain employees to post to the general ledger. The employees with this general authorization are given this authority through user ID and password.
8. (SO 6) In a manual system with proper segregation of duties, an employee in the general ledger department should only b. post transactions to the general ledger. These employees should never authorize general ledger posting, post to subsidiary ledgers, or reconcile subsidiary ledgers to general ledger accounts.
9. (SO 7) The following statement about reporting is true: d. Internal reports are tailored to the specific needs of each management level and function. Internal reports do vary greatly and are tailored specifically to the management level and function.
10. (SO 8) a. Vendor is not typically an area of measure in a balanced scorecard. The areas of measure in a balanced scorecard are financial, customer, internal processes, and learning and growth.