Match Each Situation With The Fraud Triangle Factor 494010

Match Each Situation With The Fraud Triangle Factor

Brief Exercise 8-1 Match each situation with the fraud triangle factor—opportunity, financial pressure, or rationalization—that best describes it. 1. An employee’s monthly credit card payments are nearly 75% of his or her monthly earnings. 2. An employee earns minimum wage at a firm that has reported record earnings for each of the last five years. 3. An employee has an expensive gambling habit. 4. An employee has check-writing and -signing responsibilities for a small company, as well as reconciling the bank account.

Brief Exercise 8-6 The cash register tape for Bluestem Industries reported sales of $6,871.50. Record the journal entry that would be necessary for each of the following situations. (a) Cash to be accounted for exceeds cash on hand by $50.75. (b) Cash on hand exceeds cash to be accounted for by $28.32. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Brief Exercise 8-9 On March 20, Dody’s petty cash fund of $100 is replenished when the fund contains $9 in cash and receipts for postage $52, freight-out $26, and travel expense $10. Prepare the journal entry to record the replenishment of the petty cash fund.

Brief Exercise 8-13 At July 31, Ramirez Company has the following bank information: cash balance per bank $7,420, outstanding checks $762, deposits in transit $1,620, and a bank service charge $20. Determine the adjusted cash balance per bank at July 31.

Exercise 8-3 The following control procedures are used in Mendy Lang’s Boutique Shoppe for cash disbursements. (a) For each procedure, explain the weakness in internal control, and identify the internal control principle that is violated. (b) For each weakness, suggest a change in the procedure that will result in good internal control.

Exercise 8-5 Listed below are five procedures followed by Eikenberry Company. 1. Several individuals operate the cash register using the same register drawer. 2. A monthly bank reconciliation is prepared by someone who has no other cash responsibilities. 3. Joe Cockrell writes checks and also records cash payment journal entries. 4. One individual orders inventory, while a different individual authorizes payments. 5. Unnumbered sales invoices from credit sales are forwarded to the accounting department every four weeks for recording. Indicate whether each procedure is an example of good internal control or of weak internal control. If it is an example of good internal control, indicate which internal control principle is being followed. If it is an example of weak internal control, indicate which internal control principle is violated.

Exercise 8-7 Setterstrom Company established a petty cash fund on May 1, cashing a check for $100.00. The company reimbursed the fund on June 1 and July 1 with the following results. June 1: Cash in fund $1.75. Receipts: delivery expense $31.25; postage expense $39.00; and miscellaneous expense $25.00. July 1: Cash in fund $3.25. Receipts: delivery expense $21.00; entertainment expense $51.00; and miscellaneous expense $24.75. On July 10, Setterstrom increased the fund from $100.00 to $130.00. Prepare journal entries for Setterstrom Company.

Paper For Above instruction

The following analysis explores various aspects of fraud risk, internal controls, cash management, and reconciliation procedures within organizations. These topics are critical for understanding how companies can prevent fraud, ensure accurate financial reporting, and maintain effective internal controls over cash handling and disbursements. This paper will address each of the exercises sequentially, providing insights into fraud triangle factors, journal entries for cash discrepancies and petty cash replenishments, bank reconciliation adjustments, internal control weaknesses and improvements, and the evaluation of procedural controls.

Matching Situations with the Fraud Triangle Factors

The fraud triangle is a conceptual model that explains the factors that can lead to fraudulent activities within organizations. It consists of three components: opportunity, financial pressure, and rationalization. In the given scenarios, each element can be identified based on the nature of the employee’s circumstances.

Scenario 1 involves an employee whose credit card payments are significantly high relative to income, indicating substantial financial pressure. Scenario 2 entails an employee earning minimum wage at a profitable company, suggesting limited financial pressure and opportunity. Scenario 3 features an employee with a gambling habit, clearly involving financial pressure and possibly rationalization. Scenario 4’s employee, responsible for check-writing and reconciliation—especially if these responsibilities are unsegregated—may have an opportunity to commit fraud.

These scenarios underscore how financial strain and lack of internal controls can create an environment susceptible to fraud, highlighting the importance of internal control systems that limit opportunities and provide ethical safeguards.

Journal Entries for Cash Discrepancies

For Bluestem Industries, the reported sales of $6,871.50 necessitate specific journal entries based on cash variances. If cash accounted for exceeds actual cash on hand by $50.75, this suggests an overstatement of cash, requiring a debit to cash and a credit to a suspense account or cash over/short account. Conversely, if cash on hand exceeds the recorded amount by $28.32, it indicates a shortfall, needing a debit to cash over/short and a credit to cash.

These adjustments are vital for accurate cash reporting and detecting potential errors or misappropriations.

Petty Cash Replenishment

On March 20, Dody’s petty cash fund was replenished when the fund contained $9 cash, with receipts totaling $88 for postage, freight-out, and travel expenses. The journal entry involves debiting the expense accounts with the respective receipts amounts and crediting cash or petty cash for the total to restore the fund to its set amount. The replenishment ensures petty cash’s integrity and controls over expenditure tracking.

Bank Reconciliation Adjustment

Ramirez Company’s bank reconciliation at July 31 involves adjusting the bank balance for outstanding checks and deposits in transit, and recording bank charges. The calculation adjusts the bank statement balance by subtracting outstanding checks ($762) and adding deposits in transit ($1,620), then subtracting bank charges ($20). The adjusted bank balance thus aligns with the company's book balance after reconciling entries.

Internal Control Procedures Evaluation

Weaknesses and Recommendations

• Company accountant preparing reconcilations could lead to conflicts of interest, violating segregation of duties principles. Recommending an independent party perform reconciliations enhances internal control.
• Manager personally approving payments may lead to conflicts of interest or lack of segregation. Implementing segregation by assigning approval authority to personnel uninvolved in check issuance can improve controls.
• Keeping checks in an unmarked envelope signifies a lack of security and accountability. Using secure, numbered, and stored checkbooks reduces risk of theft or alteration.
• Filing paid bills without review lacks oversight. Implementing audit trails, including supervisor review and documentation, strengthens control.
• Using unnumbered checks impairs tracking; switching to numbered checks ensures accountability and facilitates reconciliation.

Control Procedures in Practice

Good Internal Controls

Procedures such as conducting monthly bank reconciliations by personnel with no cash handling responsibilities and employing segregated duties—like separate personnel ordering inventory and authorizing payments—align with internal control principles of segregation of duties and independent checks. Such practices reduce opportunities for fraud and error.

Weak Internal Controls

Allowing multiple operators on the same cash register drawer compromises accountability, elevating the risk of theft. Unnumbered sales invoices forwarded quarterly hinder audit trail reliability. These practices violate principles of proper documentation and control environment integrity.

Petty Cash Fund Management

Setterstrom Company’s petty cash activities demonstrate typical replenishment and funding adjustments. Reimbursements upon June 1 and July 1 involved calculating expenses based on receipts, debiting the relevant expense accounts, and crediting cash to replenish the fund's cash and receipts. The increase of the petty cash fund from $100 to $130 on July 10 required a journal entry reflecting additional cash infusion, ensuring that the cash account accurately reflects the fund’s new balance.

Concluding Remarks

Effective internal control systems, accurate recording of cash transactions, diligent reconciliation procedures, and ethical standards form the backbone of sound financial management. Recognizing vulnerabilities within internal processes and implementing corrective controls are essential in safeguarding assets, ensuring compliance, and upholding organizational integrity.

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