7.1 Cash and Internal Control

Question 1

What is Cash?

Answer 1

1. Coins
2. Paper Money
3. Cheques
4. Money Orders
5. Travellers’ Cheque
6. Bank Deposit

Question 2

What isn’t Cash?

Answer 2

1. Postdated Cheques (payable in future)
2. Stale-dated Cheques (6+ Months old)
3. NSF Cheques (Returned due to Non-Sufficient Funds)

Question 3

What are Cash Equivalents?

Answer 3

are short-term (3 months or less), highly liquid (easily sold) investments that are not subject to a significant risk of changes in value

• term deposits
• treasury bills
• guaranteed investment certificates (GICs)

Question 4

What are the 3 Factors of Fraud?

Answer 4

1. Opportunity
2. Financial Pressure
3. Rationalization

Question 5

What does Internal Control achieve?

Answer 5

1. reliable financial reporting
2. effective and efficient operations
3. compliance with relevant laws and regulations

Question 6

What are the 6 Control Activites?

Answer 6

1. establishment of responsibility
2. segregation of duties
3. documentation procedures
4. physical and IT controls
5. independent checks of performance
6. human resource controls

Question 7

Establishment of Responsibility

Answer 7

An essential characteristic of internal control is assigning responsibility to specific individuals. Control is most effective when only one person is responsible for a task.

Question 8

Segregation of Duties

Answer 8

1. Different individuals should be responsible for related activities.
2. The responsibility for accounting or record-keeping for an asset should be separate from the responsibility for physical custody of that asset.

Question 9

What is CAR?

Answer 9

An easy way to remember what duties should be segregated is to think of “CAR”:

1. Custody
2. Authorization
3. Recording of assets

should be done by different people.

Question 10

Errors vs Irregularities

Answer 10

1. Error = unintentional mistakes
2. Irregularities = intentional mistakes and misrepresentations

Question 11

Documentation Procedures

Answer 11

1. Documents should be pre-numbered and all documents should be accounted for
2. Only original documents (such as original receipts) for accounting entries should be promptly sent to the accounting department

Question 12

Physical and IT Controls

Answer 12

Physical and information technology (IT) controls relate to the safeguarding (protecting) of assets and enhancing the accuracy and reliability of the accounting records.

Question 13

Examples of Physical and IT Controls

Answer 13

1. Safes/ Vaults
2. Locked Warehouses
3. Computers with passwords, fingerprint, eyeball scan
4. Alarms .
5. TV Monitors/ Sensors
6. Electronic Work Monitoring

Question 14

Independent Checks of Performance

Answer 14

independent internal and/or external reviews of performance and records

1. Balance per book/ Balance per bank Rec
2. Rec of electronic journal and point of sale terminal
3. Verification of perpetual records via physical inventory count

Question 15

Internal vs External Review (Audits)

Answer 15

1. Internal Auditors = company employees who evaluate the effectiveness of the company’s system of internal control.
2. External Auditors = independent of the company (Pro Accountant)

Question 16

Human Resource Controls

Answer 16

1. Bonding = getting insurance protection against the theft of assets by dishonest employees.

• Insurance company carefully screens all individuals beforehand
• Bonded employees know the insurance company will prosecute all offenders.

2. Rotating employees’ duties and requiring employees to take vacations
3. Conducting thorough background checks.