Chapter 4 Notes Flashcards
Internal Controls
Plans to safeguard assets and ensure accuracy.
Incorrect Financial Statements
Results from errors or intentional fraud.
Errors
Accidental mistakes in transaction recording.
Fraud
Intentional deception for personal gain.
Occupational Fraud
Misuse of occupation for personal enrichment.
Fraud Triangle
Model explaining factors leading to fraud.
Opportunity
Circumstances allowing fraud to occur.
Motivation
Need prompting an individual to commit fraud.
Rationalization
Justification for committing a fraudulent act.
Sarbanes-Oxley Act of 2002
Legislation enhancing financial reporting standards.
Public Company Accounting Oversight Board (PCAOB)
Authority establishing auditing standards and ethics.
Corporate Executive Accountability
Executives must certify financial statements personally.
Nonaudit Services
Prohibited services auditors cannot perform for clients.
Financial Penalties
Severe consequences for fraudulent financial misstatements.
Imprisonment
Potential punishment for willful violations of laws.
Accounting Scandals
Events where companies misreport financial information.
WorldCom
Company involved in significant accounting fraud.
Enron
Company that misclassified expenditures to inflate profits.
Internal Control Procedures
Guidelines for maintaining accurate financial reporting.
Auditor-Client Relations
Standards governing interactions between auditors and clients.
Securities and Exchange Commission (SEC)
U.S. agency overseeing securities markets and financial disclosures.
Stewardship
Managers’ responsibility to protect company resources.
Ethical Responsibilities
Obligations of managers to act with integrity.
Auditor Rotation
Lead auditor must rotate every five years.
Audit Partner
The lead auditor responsible for a company’s audit.
Conflicts of Interest
Situations where personal interests may affect objectivity.
Hiring of Auditor
Audit firms hired by audit committee, not management.
Internal Control
Processes ensuring accurate financial reporting and compliance.
Section 404
Requires assessment of internal control effectiveness.
Sarbanes-Oxley Act (SOX)
Legislation enhancing auditor-client relations and internal controls.
Executive Accountability
Corporate executives responsible for financial reporting accuracy.
Control Activities
Policies ensuring management directives are implemented.
Risk Assessment
Identifying risks that could hinder company objectives.
Control Environment
Overall ethical tone regarding internal controls.
Information & Communication
Methods for timely information sharing within the company.
Monitoring
Ongoing assessment of internal control effectiveness.
Authorizations
Approval processes for transactions and activities.
Reconciliations
Comparing records to ensure accuracy and completeness.
Separation of Duties
Dividing responsibilities to reduce risk of errors.
Disclosure Controls
Procedures ensuring accurate financial disclosures.
Financial Reporting
Process of preparing and presenting financial statements.
Audit Committee
Board members overseeing the audit process.
Public Companies
Companies required to file financial statements with SEC.
Chief Executive Officer (CEO)
Highest-ranking executive responsible for overall operations.
Chief Financial Officer (CFO)
Executive responsible for financial planning and reporting.
Reasonable Assurance
A level of confidence in achieving control objectives.
Disclosure Controls
Designed to provide reasonable assurance of objectives.
Internal Controls
Processes to prevent errors and fraud.
Control Environment
Management’s attitudes affect internal control effectiveness.
Risk Assessment
Evaluation of internal and external risk factors.
Control Activities
Policies to protect company assets.
Monitoring
Ongoing evaluation of internal controls.
Information and Communication
Reliability depends on accounting information systems.
Separation of Duties
Dividing responsibilities to prevent fraud.
Physical Controls
Procedures to safeguard assets and records.
Proper Authorization
Ensures resources are used appropriately.
Employee Management
Guidance for employees to perform duties.
E-commerce Controls
Procedures for authorized online transactions.
Reconciliations
Periodic checks of physical assets against records.
Performance Reviews
Comparison of actual performance to expectations.
Audits
Independent assessment of internal controls.
Top Executives
Final responsibility for internal control effectiveness.
COSO Criteria
Framework for assessing internal control effectiveness.
Preventative Controls
Measures to prevent errors before they occur.
Detective Controls
Measures to identify errors after they occur.
Internal Control Framework
Guidelines for establishing effective controls.
Management Responsibility
Everyone impacts internal control operations.
Accounting Records
Documentation of financial transactions and assets.
Fraud Detection
Identifying fraudulent behavior through audits.
Cash Receipts Control
Example of physical control for cash security.
Internal Control
Company’s plan for accurate financial reporting.
COSO Criteria
Framework for evaluating internal control effectiveness.
Collusion
Coordination between individuals to bypass controls.
Top-Level Override
Ability of executives to bypass internal controls.
Control Environment
Foundation of an internal control system.
Risk Assessment
Identifying and analyzing potential risks.
Control Activities
Procedures to prevent or detect errors.
Information and Communication
Sharing relevant information for effective controls.
Financial Misstatements
Errors in financial reporting despite controls.
Ethical Employees
Workers who adhere to moral principles.
CEO and CFO Responsibility
Executives must assess internal control adequacy.
Cash
Physical currency and balances in accounts.
Cash Equivalents
Investments maturing within three months.
Money Market Funds
Short-term investment funds for cash equivalents.
Treasury Bills
Government securities maturing in less than a year.
Certificates of Deposit
Time deposits with fixed maturity dates.
Credit Card Sales
Sales transactions processed via credit cards.
Debit Card Sales
Sales transactions processed via debit cards.
Checks Received
Payments received in the form of checks.
Total Cash Balance
Sum of all cash and cash equivalents.
Final Responsibility
Top executives are accountable for internal controls.
Effective Internal Controls
Systems that help prevent financial inaccuracies.
Cash Equivalent
Assets easily convertible to cash within 3 months.
Cash Receipts
Money received from customers via various methods.
Electronic Funds Transfer (EFT)
Digital transfer of money between accounts.
Prepaid Cards
Cards loaded with funds for future purchases.
Cryptocurrencies
Digital currencies using cryptography for transactions.
Mail Opening Procedure
Daily listing of received cash and checks.
Deposit Control
Separate employee deposits cash to prevent fraud.
Cash Receipt Recording
Immediate recording of cash receipts in accounts.
Credit Card Acceptance
Reduces cash handling by employees during sales.
Service Fees
Charges deducted by credit card companies from sales.
Debit Card Functionality
Withdraws funds directly from bank account instantly.
Retailer Fees
Costs incurred by retailers for processing debit transactions.
Common Mistake in Accounting
Debit card decreases cash, not increases it.
Cash Disbursement Controls
Procedures to manage outgoing cash effectively.
Authorized Expenditures
Approval required before any purchase is made.
Check Serial Numbering
Checks must be numbered for tracking purposes.
Two Signature Requirement
Larger checks need signatures from two authorized persons.
Cash Handling Limitation
Use cards to limit physical cash transactions.
Payment Authorization
Verification of purchase accuracy before payment.
Recording Credit Sales
Documenting sales and service fees in accounts.
Debit Card Confusion
Debit cards decrease company’s cash liability.
Payment Methods
Includes cash, checks, cards, and digital payments.
Customer Payment Types
Variety of methods customers use to pay.
Debit Card Statement
Monthly summary of debit card transactions.
Credit Card Statement
Monthly summary of credit card transactions.
Purchase Receipts
Documents verifying purchase transactions made.
Separation of Duties
Dividing responsibilities to reduce fraud risk.
Maximum Purchase Limits
Set spending caps for debit and credit cards.
Upper-Level Approval
Required consent for purchases exceeding set limits.
Cash Disbursements
Payments made by cash, check, or card.
Advertising Expense
Cost incurred for promoting business activities.
Accounts Payable
Liability for purchases made on credit.
Bank Reconciliation
Process of matching bank and company cash records.
Timing Differences
Discrepancies from recording transactions at different times.
Errors in Records
Mistakes in cash records by company or bank.
Independent Verification
Third-party confirmation of cash receipts accuracy.
Cash Receipts Controls
Procedures to safeguard incoming cash transactions.
Payment Methods
Forms of settling transactions: cash, check, card.
Documentation Procedures
Required records for financial transactions and approvals.
Internal Control System
Framework to safeguard assets and ensure accuracy.
Employee Fraud Risk
Potential for dishonest actions involving cash assets.
Cash Asset Susceptibility
Vulnerability of cash to theft or mismanagement.
Cash Balance Discrepancy
Mismatch between company and bank cash records.
Accidental Errors
Unintentional mistakes in financial documentation.
Intentional Errors
Deliberate inaccuracies in financial reporting.
Cash Receipts
Money received by the company during a period.
Cash Disbursements
Money spent by the company during a period.
Beginning Cash Balance
Cash available at the start of the period.
Ending Cash Balance
Cash available at the end of the period.
EFT
Electronic funds transfer for payments.
Sales
Revenue generated from selling goods or services.
Bank Statement
Monthly summary of account transactions from the bank.
Deposits and Credits
Funds added to the account, increasing balance.
Withdrawals and Debits
Funds taken from the account, decreasing balance.
Outstanding Deposits
Deposits not yet recorded by the bank.
Outstanding Checks
Checks issued but not yet cleared by the bank.
Bank Reconciliation
Process of matching bank statement with company records.
Common Mistake
Misinterpretation of debit and credit terminology.
Debit Card (DC)
Card used for electronic payments directly from account.
Nonsufficient Funds (NSF)
Insufficient balance to cover a transaction.
Service Fees (SF)
Charges applied by the bank for account maintenance.
Interest Earned (INT)
Money earned on account balance over time.
Note Collected
Funds collected on behalf of the company.
Bank Errors
Mistakes made by the bank in account transactions.
Cash Account
Record of cash transactions for the company.
Memo
Notes attached to transactions for reference.
Repairs
Expenses incurred for maintaining or fixing assets.
Insurance
Cost of coverage against potential future losses.
Bank Collections
Funds collected by the bank for the company.
Interest Earned
Income from average daily cash balance.
Electronic Funds Transfers (EFTs)
Digital transfer of funds between accounts.
NSF Checks
Checks from customers with insufficient funds.
Debit Card Purchases
Transactions made using a debit card.
Bank Service Fees
Charges applied by the bank for services.
Company Errors
Mistakes made in recording transactions.
Outstanding Deposits
Deposits not yet reflected in bank statement.
Cash Increases
Funds added to the company’s cash balance.
Cash Decreases
Funds deducted from the company’s cash balance.
Bank Reconciliation
Process of aligning bank and company cash records.
Company’s Cash Balance
Cash amount recorded in the company’s books.
Bank’s Cash Balance
Cash amount reported by the bank statement.
Deposits Outstanding
Deposits made but not yet processed by the bank.
Checks Outstanding
Checks issued but not yet cleared by the bank.
Service Fee
Charge deducted by the bank for account maintenance.
Corrected Advertising Expense
Adjustment made to rectify an expense error.
Note Received
Loan or payment received, increasing cash balance.
NSF Check Adjustment
Cash balance reduced due to bounced customer check.
Account Receivable
Amount owed by customers for goods/services provided.
Common Mistake
Misunderstanding of NSF checks as company checks.
Cash Receipts
Total cash collected by the company.
Cash Disbursements
Total cash paid out by the company.
NSF Check
A check returned due to insufficient funds.
Cash Account Update
Adjusting cash balance for reconciliation items.
Debit Cash
Increase cash balance in accounting records.
Credit Cash
Decrease cash balance in accounting records.
Outstanding Deposits
Deposits recorded by company, not yet by bank.
Outstanding Checks
Checks issued but not yet cleared by bank.
Bank Errors
Mistakes made by the bank affecting balance.
Company Errors
Mistakes made by the company affecting balance.
Miscellaneous Expense
Recorded when discrepancies cannot be resolved.
Miscellaneous Revenue
Recorded for positive discrepancies in cash balance.
Timing Differences
Discrepancies due to timing of transactions.
Bank Statement
Official record of transactions from the bank.
General Ledger
Company’s comprehensive accounting record.
Reconciliation Schedule
Document comparing bank and company cash balances.
Interest Received
Earnings credited to the company’s account by bank.
Service Fee Expense
Fees charged by the bank for services.
Utilities Expense
Costs incurred for utility services.
Advertising Expense
Costs associated with promoting the business.
Accounts Receivable
Money owed to the company by customers.
Notes Receivable
Written promises for payment from customers.
Cash Balance Per Reconciliation
Final adjusted cash balance after reconciliation.
Correction for Rent
Adjustment made for rent discrepancies.
NSF Check
Non-sufficient funds check from a customer.
Accounts Receivable
Money owed by customers for goods/services.
Petty Cash Fund
Small cash amount for minor purchases.
Establishing Petty Cash
Setting up a petty cash fund with cash withdrawal.
Debit Card
Card used for direct bank account payments.
Credit Card
Card allowing deferred payment for purchases.
Bank Reconciliation
Process of matching bank statement with records.
Employee Purchases
Expenditures made by employees on behalf of company.
Replenishing Petty Cash
Refilling petty cash fund after expenditures.
Employee Expenditures
Purchases made by employees using company funds.
Internal Controls
Procedures to ensure proper handling of funds.
Receipts Requirement
Employees must provide proof of purchases.
Spending Limits
Maximum allowable spending for employees with cards.
Pre-Approval
Required authorization for major expenditures.
Credit Card Reconciliation
Matching receipts to credit card statements.
Expense Recognition
Recording expenditures in accounting records.
Cash Adjustment
Modifying cash balance due to NSF checks.
Company-Issued Cards
Cards provided by company for employee purchases.
Expenditure Justification
Reasoning provided for employee purchases.
Formal Purchasing Procedures
Official methods for approving large purchases.
Accounting for Expenditures
Recording and categorizing employee purchases.
Total Employee Purchases
Sum of all expenditures made by employees.
Cash Account Credit
Reducing cash balance in accounting records.
Expense Categories
Different types of expenses recorded in accounting.
Cash Inflows
Money received by a business during a period.
Cash Outflows
Money spent by a business during a period.
Operating Activities
Cash transactions involving revenues and expenses.
Investing Activities
Cash transactions for long-term asset investments.
Financing Activities
Cash transactions for borrowing and owner investments.
Statement of Cash Flows
Financial report detailing cash inflows and outflows.
Net Cash Flows
Total cash inflows minus total cash outflows.
Current Asset
Cash or assets expected to be converted to cash within a year.
Noncurrent Asset
Assets not expected to be converted to cash within a year.
Cash at Beginning
Cash balance at the start of the reporting period.
Cash at End
Cash balance at the end of the reporting period.
Revenue Activities
Cash inflows from core business operations.
Expense Activities
Cash outflows for operational costs.
Common Stock
Equity shares issued by a company to raise capital.
Cash Dividends
Payments made to shareholders from profits.
Equipment Purchase
Cash outflow for acquiring long-term assets.
Bank Borrowing
Cash inflow from loans taken from financial institutions.
Rent Payment
Cash outflow for leasing property or equipment.
Salary Payment
Cash outflow for employee compensation.
Training Revenue
Cash inflow from providing services to customers.
Advance Payments
Cash received for services to be rendered in the future.
Cash Flow Period
Time frame covered by the cash flow statement.
Snapshot of Cash
A financial overview at a specific point in time.
Long-term Assets
Assets held for more than one year.
Cash flows
Movement of cash in and out of a business.
Investing activities
Cash flows related to long-term asset transactions.
Financing activities
Cash flows from borrowing or repaying debt.
Operating activities
Cash flows from core business operations.
Cash and cash equivalents
Liquid assets available for immediate use.
Change in cash
Difference between beginning and ending cash balances.
Net cash flows
Total cash flow after all activities are considered.
Cash holdings
Total cash and cash equivalents owned by a company.
Noncash assets
Assets that do not have immediate cash value.
Cash ratio
Percentage of cash assets to noncash assets.
Live Nation Entertainment
Company with significant cash and cash equivalents.
AMC Networks
Company analyzed for cash flow comparison.
Operating cash flows
Cash generated from normal business operations.
Investing cash flows
Cash used for purchasing or selling assets.
Financing cash flows
Cash received from or paid to investors and creditors.
Foreign currency effects
Impact of currency exchange on cash flows.
Cash flow statement
Financial report detailing cash inflows and outflows.
Balance sheet
Snapshot of a company’s financial position at a point.
Cash analysis
Evaluation of cash flow performance over time.
Cash assets
Assets that can be quickly converted to cash.
Idle resources
Excess cash not utilized for generating revenue.
