Ch 7. internal control and cash (TEXTBOOK)

Question 1

what are the 3 main objectives of internal control

Answer 1

1) reliable financial reporting
2) effective and efficiency operations
3) compliance w relevant laws and regulations

Question 2

internal control systems help prevent and detect errors

Answer 2

!!

Question 3

differenece between unintenitional misstatements and fraud

Answer 3

INTENT!!

unintentional misstatementnts: errors not on purpose
Fraud: purposefully creating errors

Question 4

5 components of good intenral control systems

Answer 4

1) control environment
2) risk assesment
3) control activities
4) info and communication
5) monitoring activities

Question 5

what do control activities include (5 control activities)

Answer 5

-assignment of responsibility
-segregation of duties
-documentaiton
-physical controls
-review and reconciliation

Question 6

what 2 factors affect specific control activities

Answer 6

1) risks it is facing
2) size and nature of the company

Question 7

is it easier to segregatte duties in a small company or large company

Answer 7

large company, because there are plenty of employees to delegate to

Question 8

control activities- assignment of responsibility

Answer 8

responsibility should be assigned to specific employees, INCREASES ACCOUNTABILITY

each cashier manages own cash drawer

Question 9

Control activities- segregation of duitrs

Answer 9

responsibility for authorization and rercording of transactions and custody of assets should be assigned to differnt individuals

1) physical custody 2) authorization of transactions 3) recording of transactions

should be done by 3 different people!!1

Question 10

control activities- documentation

Answer 10

evidence that transactions and events have occured at specified times and specified amounts

-> you should keep documents to prove

Question 11

control activities- physical controls (Specifically access controls)

Answer 11

safeguards assets and enhances the accuracy of records!

Question 12

control activity- review and reconciliation

Answer 12

data prepared by employees should be revied by people internally and externally

reconciliation involves comparing between 2+ documents

Question 13

EXAMPLE of review and reconciliation activity

Answer 13

bank reconciliation

Question 14

limitations of internal control

Answer 14

ultimately the controls can only provide reasonable asurancethat assets are safeguarded and records are reliable

Question 15

examples of limitation on internal control

Answer 15

cost/benefit considerations (is the cost of the internal control worth it?)

human error

collusion (This impacts the control activity of segregation of duties the most because people are colluding)

management override

Question 16

what is fraud

Answer 16

intentional act to steal assets or to misstate financial info

Question 17

examples of mistatements that create fraud

Answer 17

1) recording expenses as assets

2) overstating useful life!! (think about this, the longer the useful life, the lower yearly depreciation expense, higher net income)

3) recroding revenue that do not exist

Question 18

what are the 3 factors of the fraud triangle

Answer 18

opportunity pressure rationalization

Question 19

control activites over cash recipets

Answer 19

internal control over cash recipets is more effecitve when cash reciepts are deposited into the bank daily or are made by EFT

Question 20

how are the 5 control activities applicable to cash reciepts

Answer 20

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Question 21

control activities over cash payments

Answer 21

control activites over cash payments are more effective when payments are made by cheqye or by EFT rather than in cash

Question 22

what is the easier method of payment to do control activiites over

Answer 22

when it is in cheques, or EFT!!! this is easeir to control than cash

Question 23

how are the 5 internal control activities applicable to cash payments

Answer 23

1) assignment of respo: specific employees should be authroized to approve EFT payments
2) segration of duties: have diff employees prepare, approve, adn record EDT payments
3) documentaiton: ensuring that each EFT is supported by an invoice
4) Physcial control: require multifactor authetntication to log into eft system
5) revie and reconciliation: reconcile the total authroized EFT payments with actual payments from bank accounts DAILY!!

Question 24

BANK ACCOUNTS ARE WHAT?

Answer 24

a key control activtiy

Question 25

how does a company safeguard cash

Answer 25

slide 22

Question 26

slide 23

Answer 26

slide 23

Question 27

what are the 2 recrods you are reconicling in bank reconciliation

Answer 27

bank and books!

Question 28

Bank, what do they consider a cheqye, and what do they consider a deposit

Answer 28

Debit! (decrease)

credit (increase)

Question 29

Company what do they consider a cheqye, and what do they consider a deposit

Answer 29

Credit (decrease)

Debit (increase)

Question 30

how do errors come in comapny recrods and bank statements

Answer 30

either party can make human errors

Question 31

what are timing differences between company records and bank statemetn

Answer 31

timing differences result in on eo fthe parties recroding the transaction before the other is aware

Question 32

do you add or subtract these from cash balance per bank statement
A) deposits in transit
2) Outstanding cheques

Answer 32

add

subtract

Question 33

what is the formula to determine deposits in transit at end of perio

Answer 33

deposits in transit at beginning of period + deposits recorded in company’s books this period- deposits recroded on this periods bank statement = depostis in transit at the enf of period

Question 34

what is the formula to determine outstanding cheques

Question 35

How to caclulate reconciled cash balance per bank

Answer 35

Cash balance per bank statement
Add: Deposits in transit

Less: outstanding cheques

Question 36

what are outstanding cheques

Answer 36

cheques you have already wrote but have not cleared the bank yet!

Question 37

how do we do recondiled cash balance per book

Answer 37

cash balance per books
Add: electronic recipets from customers on account

Less: returned NSF cheque plus service charge
- Bank sesrvice and debit/credit card fees

Question 38

what is a nsf cheque

Answer 38

not suffficeint funds cheque

Question 39

should the reconciled cash balance per bank and reconciled cash balance per books be the same on the bank reconciliation statement?

Answer 39

YES! that is the whole point

Question 40

do you make any JEs from the bank side?

Answer 40

HELL no!! you are not the bank

Question 41

what JEs should you record in bank reconciliation?

Answer 41

only for the company’s books!
-> each reconciling item in determined should be journalized and posted

Question 42

what 2 statements is cash reported on

Answer 42

sofp
socf

Question 43

what are cash equivalents

Answer 43

short term highly liquid held for trading investments that are subject to insigincant risk of changes in value

Question 44

what can cash be combined with

Answer 44

cash equivalents

Question 45

if cash is in a deficit or OVERDRAFT AT YEAR END, IT IS REPORTED AS WHAT ON SOFP

Answer 45

current liability = bank indebtedness!!!

Question 46

what are the 6 principles of cash management

Answer 46

1) increase the speed of reciviables collection
2) keep inventory low
3) take advantage of credit periods
4) plan timing of major expenditures
5) invest idle cash
6) prepare a cash budget