Chapter 5 - Internal Control, Cash, and Receivables Flashcards
True or false: internal controls are the primary means by which fraud errors are prevented.
True
What type of asset is most susceptible to fraud?
Cash.
What are the most common types of fraud?
Insurance fraud, forgery, credit card fraud, and identity theft.
What are the two most common types of fraud that impacts a company’s financial statements?
- misappropriation of assets
- fraudulent financial reporting
Give examples of internal control procedures.
Smart hiring practices, monitoring, limited access, and proper approvals.
What’s the definition of a budget?
“A financial plan that helps control day-to-day management activities.”.
What’s the definition of an audit?
“An examination of a company’s financial statements and its accounting system.”.
What’s the most liquid asset?
Cash.
How are receivables mainly acquired?
By selling goods and services (accounts receivable).
True or false: accounts receivable is a type of long-term assets.
False
What’s another word for “debtor”?
“borrower”.
What’s another word for “creditor”?
“lender”.
True or false: a debtor has a note payable and a creditor has a note receivable.
True
Account for the three parts of the fraud triangle.
- opportunity
- pressure
- rationalization
What does the term “asset misappropriation” refer to?
Employees stealing assets (e.g. cash and inventory).
What’s one of the most effective ways to detect fraud?
Whistleblowing.
What does the term “corporate governance” refer to?
A set of organizational practices that aim at clarifying a company’s corporate direction and the management’s responsibility and accountability.
What’s the most important internal control mechanism?
The “dual control” principle.
Give examples of safety nets.
Internal control, corporate governance, external auditors, enforcement agencies, and financial analysts.
What are cash equivalents?
Investments that are short-term and highly liquid.
How much cash a company should hold depends on what?
The type of business and the current financial situation.
Give examples of liquid assets.
Cash, short-term investments, and receivables.
What’s the definition of a “bad debt” expense?
When a customer doesn’t pay an account receivable.
