Chapter 8 – Exercises & Cases

Multiple Choice Questions

1. The fraud triangle includes which three factors?
   a) Pressure, Opportunity, Rationalization
   b) Money, Access, Time
   c) Greed, Need, Chance
   d) Management, Employees, Systems
   Answer: a) Pressure (motive), Opportunity, and Rationalization.

2. Internal controls that prevent problems from occurring are called:
   a) Detective controls
   b) Preventive controls
   c) Corrective controls
   d) Reactive controls
   Answer: b) Preventive controls stop problems before they occur.

3. Petty cash is replenished by:
   a) Debiting Petty Cash account
   b) Crediting Petty Cash account
   c) Debiting expense accounts and crediting Cash (Bank)
   d) Debiting Cash (Bank) and crediting Petty Cash
   Answer: c) Replenishment debits expenses and credits Cash (Bank); Petty Cash account stays at original amount.

4. Outstanding checks on a bank reconciliation are:
   a) Added to bank balance
   b) Subtracted from bank balance
   c) Added to book balance
   d) Subtracted from book balance
   Answer: b) Outstanding checks are subtracted from bank balance (checks written but not yet cashed).

5. SEPA stands for:
   a) Single European Payment Area
   b) Standard Euro Payment Agreement
   c) Single Euro Payments Area
   d) Secure Electronic Payment Access
   Answer: c) Single Euro Payments Area - standardized euro payment system.

6. In Luxembourg, fiscal cash registers are required for:
   a) All businesses
   b) Only large businesses
   c) Restaurants and retail stores
   d) Service businesses only
   Answer: c) Fiscal cash registers are required for restaurants, retail stores, and businesses with cash sales.

7. The purpose of separating duties is to:
   a) Increase efficiency
   b) Reduce the opportunity for fraud
   c) Save money
   d) Simplify procedures
   Answer: b) Separation of duties reduces opportunity for fraud by preventing one person from having too much control.

8. Bank service charges on a bank reconciliation are:
   a) Added to bank balance
   b) Subtracted from bank balance
   c) Added to book balance
   d) Subtracted from book balance
   Answer: d) Bank service charges are subtracted from book balance (expense on bank statement not yet in books).

9. Which PCN account is used for petty cash?
   a) 510000
   b) 500000
   c) 530000
   d) 520000

   Answer: b) 500000 is Petty Cash (Class 5).

10. Management's attitude toward controls and ethics is called:
    a) Control environment
    b) Tone at the top
    c) Corporate culture
    d) Management philosophy
    Answer: b) "Tone at the top" refers to management's attitude toward controls and ethical conduct.

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Questions

1. Explain the fraud triangle. How can businesses address each factor to prevent fraud?

2. What are internal controls? Describe the three types and give examples of each.

3. Why is separation of duties important? Give an example of how separating duties prevents fraud.

4. Explain the purpose of petty cash. How is a petty cash fund established and replenished?

5. What is a bank reconciliation? Why is it important, and how often should it be done?

6. Describe the common items that cause differences between bank statements and cash records. How is each handled in a bank reconciliation?

7. What are management's responsibilities for internal controls? Why is "tone at the top" important?

8. Explain SEPA and how it affects payment processing in Luxembourg. What are the benefits?

9. What are Luxembourg's requirements for fiscal cash registers? Who must use them, and what features must they have?

10. A business discovers a cash shortage. What steps should be taken to investigate and prevent future shortages?

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Problems Set A

Problem A-1: Petty Cash

A business establishes a €300 petty cash fund. During the month, the following expenses are paid:

• Office supplies: €45
• Postage: €25
• Coffee: €15
• Taxi: €30

At month end, remaining cash is €185. Prepare: a) Entry to establish fund b) Entry to replenish fund

Problem A-2: Bank Reconciliation

Prepare a bank reconciliation from the following:

Bank Statement:

• Balance: €5,000
• Service charge: €15
• Interest earned: €10

Books:

• Cash balance: €4,800

Additional:

• Deposit in transit: €500
• Outstanding check: €300

Problem A-3: Internal Controls

List five internal controls a small retail business should implement for cash. Explain how each prevents fraud or errors.

Problem A-4: Fraud Prevention

A business suspects an employee is stealing cash. What red flags might indicate fraud? What steps should be taken?

Problem A-5: Payment Methods

Record the following transactions with proper PCN accounts: a) Receive €1,000 payment via SEPA transfer b) Receive €500 payment via card (Cetrel) c) Pay €200 expense via bank transfer d) Pay €50 expense from petty cash

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Problems Set B

Problem B-1: Complete Bank Reconciliation

Prepare a complete bank reconciliation and journal entries from:

Bank Statement (Nov 30):

• Balance: €12,500
• Deposits: €8,000
• Checks cleared: €10,000
• Service charge: €25
• Interest: €15
• Electronic payment: €100

Books (Nov 30):

• Cash balance: €10,585

Additional:

• Deposit made Nov 30: €1,500 (not on statement)
• Outstanding checks: €500, €300
• Error: Check recorded as €200, but bank shows €180

Problem B-2: Petty Cash with Shortage

Petty cash fund of €200. Expenses paid: €150. Remaining cash: €45. There is a €5 shortage. Prepare replenishment entry.

Problem B-3: Internal Control Design

Design internal controls for a Luxembourg restaurant with:

• Cash sales
• Card payments (Cetrel)
• Inventory (food, beverages)
• 5 employees
• Owner present most of the time

Include controls for cash, inventory, and payments.

Problem B-4: Payment Method Accounting

A Luxembourg retail store receives payments through multiple methods:

• Cash: €2,000 (excluding VAT), VAT 17%
• Card (Cetrel): €3,000 (excluding VAT), VAT 17%
• SEPA transfer: €1,000 (excluding VAT), VAT 17%

Record all transactions with proper PCN accounts. Explain how each payment method affects accounting.

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Comprehensive Problem

Comprehensive Problem 8: Complete Cash Management and Controls

Le Petit Bistro needs to improve its cash management and internal controls. Current situation:

Current Issues:

• Cash shortages occurring regularly
• No formal petty cash system
• Bank reconciliation done irregularly
• Limited separation of duties (only 3 employees)
• Mix of payment methods (cash, cards, transfers)

Transactions for November:

Cash Sales:

• Daily cash sales average €1,500
• Some days show shortages of €10-€50
• Receipts not always issued

Card Payments (Cetrel):

• Average €2,000 per day
• Settles to bank account next day
• Processing fees: 1.5%

Bank Account:

• Beginning balance (Nov 1): €10,000
• Deposits: €45,000 (cash and card settlements)
• Checks written: €35,000
• Bank service charges: €50
• Interest earned: €25

Petty Cash:

• No formal system
• Small expenses paid from register
• No receipts kept
• Estimated €200 per month in small expenses

Required:

1. Design Internal Controls:
   a) Cash receipt controls
   b) Cash disbursement controls
   c) Petty cash controls
   d) Bank reconciliation procedures
   e) Payment method controls

2. Establish Petty Cash Fund:
   a) Determine appropriate amount
   b) Prepare establishment entry
   c) Design petty cash procedures
   d) Create petty cash log format

3. Bank Reconciliation:
   a) Prepare bank reconciliation for November 30
   b) Identify all reconciling items
   c) Prepare necessary journal entries
   d) Verify reconciliation balances

4. Payment Method Analysis:
   a) How should cash sales be recorded?
   b) How should card payments be recorded?
   c) How should card settlement be handled?
   d) What PCN accounts are involved?

5. Fraud Prevention:
   a) What controls would prevent cash theft?
   b) How can shortages be detected and prevented?
   c) What procedures should be implemented?
   d) How should discrepancies be handled?

6. Luxembourg Compliance:
   a) What fiscal cash register requirements apply?
   b) What cash handling regulations must be followed?
   c) What documentation is required?
   d) How do controls support compliance?

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Cases

Case 8-1: The Missing Cash

Marie's restaurant has been experiencing regular cash shortages. Some days the register is short €20-€50, other days it's over by small amounts. Marie suspects an employee but isn't sure.

Investigation Findings:

• Shortages occur on different days
• No pattern to which employee is working
• Receipts don't always match sales
• Some transactions not recorded
• Cash not counted at shift changes

Questions for Analysis:

1. What could be causing the cash shortages?

2. What internal controls are missing that would prevent or detect this?

3. How should Marie investigate the problem?

4. What procedures should be implemented to prevent future shortages?

5. How should Marie handle the situation with employees?

6. What Luxembourg regulations might be relevant?

Case 8-2: Choosing Payment Methods

A new Luxembourg retail store is deciding which payment methods to accept. The store will sell clothing with different VAT rates (children's 3%, adult 17%).

Considerations:

• Customer preferences
• Processing costs
• Accounting complexity
• Security
• Compliance requirements

Questions for Analysis:

1. Which payment methods should the store accept? Why?

2. How does each payment method affect:
   a) Accounting procedures?
   b) Cash management?
   c) Internal controls?
   d) Compliance?

3. What are the costs and benefits of each method?

4. How should card payments (Cetrel) be integrated with accounting?

5. What controls are needed for each payment method?

6. How does SEPA affect the store's payment processing?

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Solutions are published in supplementary/instructor/solutions/chapter_08_solutions.md.