Ch 7. internal control and cash (TEXTBOOK) Flashcards
what are the 3 main objectives of internal control
1) reliable financial reporting
2) effective and efficiency operations
3) compliance w relevant laws and regulations
internal control systems help prevent and detect errors
!!
differenece between unintenitional misstatements and fraud
INTENT!!
unintentional misstatementnts: errors not on purpose
Fraud: purposefully creating errors
5 components of good intenral control systems
1) control environment
2) risk assesment
3) control activities
4) info and communication
5) monitoring activities
what do control activities include (5 control activities)
-assignment of responsibility
-segregation of duties
-documentaiton
-physical controls
-review and reconciliation
what 2 factors affect specific control activities
1) risks it is facing
2) size and nature of the company
is it easier to segregatte duties in a small company or large company
large company, because there are plenty of employees to delegate to
control activities- assignment of responsibility
responsibility should be assigned to specific employees, INCREASES ACCOUNTABILITY
each cashier manages own cash drawer
Control activities- segregation of duitrs
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
control activities- documentation
evidence that transactions and events have occured at specified times and specified amounts
-> you should keep documents to prove
control activities- physical controls (Specifically access controls)
safeguards assets and enhances the accuracy of records!
control activity- review and reconciliation
data prepared by employees should be revied by people internally and externally
reconciliation involves comparing between 2+ documents
EXAMPLE of review and reconciliation activity
bank reconciliation
limitations of internal control
ultimately the controls can only provide reasonable asurancethat assets are safeguarded and records are reliable
examples of limitation on internal control
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
what is fraud
intentional act to steal assets or to misstate financial info
examples of mistatements that create fraud
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
what are the 3 factors of the fraud triangle
opportunity pressure rationalization
control activites over cash recipets
internal control over cash recipets is more effecitve when cash reciepts are deposited into the bank daily or are made by EFT
how are the 5 control activities applicable to cash reciepts
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control activities over cash payments
control activites over cash payments are more effective when payments are made by cheqye or by EFT rather than in cash
what is the easier method of payment to do control activiites over
when it is in cheques, or EFT!!! this is easeir to control than cash
how are the 5 internal control activities applicable to cash payments
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!!
BANK ACCOUNTS ARE WHAT?
a key control activtiy
how does a company safeguard cash
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what are the 2 recrods you are reconicling in bank reconciliation
bank and books!
Bank, what do they consider a cheqye, and what do they consider a deposit
Debit! (decrease)
credit (increase)
Company what do they consider a cheqye, and what do they consider a deposit
Credit (decrease)
Debit (increase)
how do errors come in comapny recrods and bank statements
either party can make human errors
what are timing differences between company records and bank statemetn
timing differences result in on eo fthe parties recroding the transaction before the other is aware
do you add or subtract these from cash balance per bank statement
A) deposits in transit
2) Outstanding cheques
add
subtract
what is the formula to determine deposits in transit at end of perio
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
what is the formula to determine outstanding cheques
How to caclulate reconciled cash balance per bank
Cash balance per bank statement
Add: Deposits in transit
Less: outstanding cheques
what are outstanding cheques
cheques you have already wrote but have not cleared the bank yet!
how do we do recondiled cash balance per book
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
what is a nsf cheque
not suffficeint funds cheque
should the reconciled cash balance per bank and reconciled cash balance per books be the same on the bank reconciliation statement?
YES! that is the whole point
do you make any JEs from the bank side?
HELL no!! you are not the bank
what JEs should you record in bank reconciliation?
only for the company’s books!
-> each reconciling item in determined should be journalized and posted
what 2 statements is cash reported on
sofp
socf
what are cash equivalents
short term highly liquid held for trading investments that are subject to insigincant risk of changes in value
what can cash be combined with
cash equivalents
if cash is in a deficit or OVERDRAFT AT YEAR END, IT IS REPORTED AS WHAT ON SOFP
current liability = bank indebtedness!!!
what are the 6 principles of cash management
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
