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Solutions Guide:

1.) Identify the major reporting requirements associated with each of the following: a. Securities Act of 1933 b. Securities and Exchange Act of 1934 c. 10-K report d. 10-Q report

a. Securities Act of 1933—The act required most corporations to file registration statements before selling stock to investors. Reports must include a balance sheet and income statement.

b. Securities and Exchange Act of 1934—Required corporations to provide annual financial reports to stockholders. These reports must be audited by independent accountants.

c. 10-K report—Annual registration statements filed by corporations with the SEC.

d. 10-Q report—Quarterly statements filed by corporations with the SEC.

2.) Identify each of the following: A. the private sector organization that is currently responsible for setting financial accounting standards in the United States b. The private sector organization currently responsible for setting state and local government accounting standards in the United States c. The organization that exists to influence the development of international accounting standards D. the federal agency that oversees accounting at the federal government E. the organization responsible for the enforcement of financial accounting standards in the United States

a. FASB

b. GASB

c. IASB

d. GAO

e. SEC

3.) Mag’s Pie shop is a rapidly growing baker and distributor of specialty pies for festive occasions. Mag’s CPA advisor keeps recommending that Mag install better internal controls over the business. Specifically the CPA recommends that Mag separate the company’s record keeping function from the physical control of cash and other assets. The CPA also recommends that Mag use only preprinted and prenumbered forms for all business transactions. a. What is the purpose of internal controls? Be specific b. For each internal control suggested by the CPA give one example of an unsatisfactory situation or event that the control would prevent.

a. The purpose of internal control is to protect the organization’s resources and to ensure the reliability of its accounting records. Every internal control, therefore, is designed to prevent misappropriation of the company’s assets or the misstatement of its accounts.

b. Example: If the same person both handles the cash and accounts for cash, that individual could cover up the theft of cash by charging it off to some expense. The person might increase the Office Supplies Expense account balance by $100 and put the cash in his or her pocket.

Example: Without preprinted and prenumbered sales invoices, a dishonest employee could make a sale to a customer, give a receipt, pocket the cash, and not report the sale. With prenumbered sales invoices, the missing invoice (copy) would be noticed immediately because one numbered invoice (copy) would be missing from the sequence.

4.) Consider each of the following situations. A. sales clerks in a retail store are assigned to a specific cash register. The cash register records and identification and price for each item purchased. Cash payments are collected from customers and placed in the cash drawer. A copy of the cash register sale slip is given to the customer. At the end of each shift, the employee takes the cash drawer and cash register tape to a supervisor who counts the cash, verifies the sales, and signs an approval form. The sales clerk also signs the form that identifies the amount of cash and amount of sales for the day. c. A ticket seller at a movie theater is issued a cash drawer with $100 change and a roll of prenumbered tickets when the theater opens each day. The seller collects cash from customers and issues the tickets. Each customer hands a ticket taker who tears the ticket in half and gives half back to the customer. At the end of the day the ticket seller retains the cash drawer and tickets to a supervisor. For each of the above, please discuss why the procedures are used and how they provide effective internal control.

A. • Specific cash register—Each sales clerk is responsible for one cash register. If clerks used a variety of cash registers during a shift, errors and omissions could not be traced to one individual.

• Sales are entered (recorded) into the register. Cash must be present at the end of the shift in the amount that equals sales.

• Cash register records identification and price. Sophisticated cash registers that record the identification and price ensure the price is correct for each item sold.

• Copy of cash register slip is given to customer. Customers who receive cash register slips provide another form of internal control because they help verify that the sale was recorded for the correct amount.

• Sales clerk and supervisor count cash and reconcile to cash register and sign forms. Before responsibility for the cash changes from clerk to supervisor, both parties verify that the amount reconciles with the cash register tape.

B. • The movie example illustrates segregation of duties as an internal control. The ticket seller must produce cash for each ticket that he sells. The ticket taker ensures each patron has purchased a ticket. Such a system prevents the ticket taker from pocketing patrons’ cash and admitting them to the theater without issuing a ticket.

5.) Examine the auditors report reproduced in Appendix A at the end of the text and answer the following questions. a. Who is General Mills auditor? On what date did the author complete its audit work? B. what was the auditors responsibility with respect to the company’s financial statement? What was the responsibility of management? C. what kind of opinion did General Mills auditors issue? Why is the opinion important to the company?

A. General Mills’ auditor is KPMG LLP. The audit was completed on June 29, 2004.

B. The auditors’ responsibility is to express an opinion on the financial statements. Management is responsible for the financial statements.

C. The auditor issued an unqualified opinion. Therefore, KPMG LLP believes the financial statements present, in all material respects, General Mills’ financial position. An unqualified opinion is important to the company because all potential investors, lenders, or other interested parties have assurance from an independent party that financial information is reliable.

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