Chapter 7 Flashcards
Three fraud characteristics
Opportunity
Financial pressure
Rationalization
fraud
a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer
Internal control
All the related methods and measures to safeguard assets, enhance reliability of its accounting records, increase efficiency of operationjs, and ensure compliance with laws and regulations
5 primary components of internal controls
A control environment
risk assesment
control activities
information and communication
monitoring
Control environment
It is the responsibility of top management to make it clear that the organization values integrity and unethical activity will not be tolerated
“tone at the top”
risk assesment
Companies must identify and analyze the various factors that create risk for the business and must determine how to manage these risks
control activities
to reduce fraud, management must design policies and procedures to address the specific risks faced by the company
Information and communication
The internal control system must capture and communicate all perttienent info both down and up the organization, as well as communicate info to appropriate external parties
monitoring
internal control systems must be monitored periodically for their adequacy
defiencies reported to top management or board of directors
Six principles of control activities
Establishment of responsibility
Segregation of duties
Documentation procedures
Physical controls
Independent internal verification
Human resource controls
Control is most effective when ___________________________________
Only one person is responsible for a given task
The work of one employee should _____________________________
provide a reliable basis for evaluating the work of another employee
Making one individual responsible for related activities increases ___________________________
the potential for errors and irregularities
The custodian of the asset is not likely to convert the asset to personal use when ________________________________________
one employee maintains the record of the asset, and a different employee has physical custody of the asset
Segregation of duties (accountability for assets)
Accounting employee A - maintains cash balances per books
Assistant cashier B - maintains custody of cash on hand
Prenumbered documents
Companies should use prenumbered documents, and all documents should be accounted for
Forwarding source documents
Employees should promptly forwards source documents for accounting entries to the accounting department
*Helps ensure timely recording of the transaction*
Physical controls
Relate to the safeguarding of assets and enhance the accuracy and reliability of the accounting records
independent internal verification
Involves the review of data prepared by employees
internal auditors
Company employees who continuously evaluate the effectiveness of the company’s internal control systems
recommend improvements when needed
Human resource control activities
Bond employees who handle cash
rotate employees’ duties and require employees to take vacations
conduct thorough background checks
bonding
involves obtaining insurance protection against theft by employees
Controls may _______________________
vary with the risk level of the activity
reasonable assurance
Companies generally design their systems of internal control to provide reasonable assurance of proper safeguarding of assets and reliabliyt of the accounting records
human element
factor in every system of internal controls
*employee fatigue, carelessness, or indifference
Collusion
When two or more individuals work together to get around prescribed controls
can reduce the effectiveness of a system, eliminating the protection offered by segregation of duties
Cash (internal controls)
Cash is the asset most susceptible to fraudulent activities
Internal control over cash disbusrsments
is more effective when companies pay by check, rather than by cash
Voucher system
a network of approvals by authorized individuals, acting independently, to ensure that all disbursements by check are proper
Voucher
An authorization form prepared for each expenditure in a voucher system
voucher register
where vouchers are recorded
check register
the paid voucher is sent to the accounting department for recording in the check register
Ethics note: petty cash fund strengthend by:
- having a supervisor make surprise counts of the fund to confirm whether the paid petty cash receipts and fund cash equal the fund amount
- canceling or mutilating the paid petty cash receipts so they cannot be resubmitted for reimbursement
__________________ contributes significantly to good internal control over cash
The use of a bank
Bank reconciliation
The process of comparing the bank’s balance with the company’s balance, and explaining the differences to make them agree
canceled check
a paid check (alternative word)
Bank statement essentialy
is a copy of the bank’s records sent to the customer for periodic view
NSF (not sufficient funds) check
A check that is not paid by a bank because of insufficient funds in a bank account
bank statement
a statement received monthly from the bank that shows the depositor’s bank transactions and balances
Reconciling the bank account
Making the balance per books and the balance per bank agree with the true amount
Two causes of reconciling the bank account
Time lags
Errors
Time lags
Prevent one of the parties from recording the transaction in the same period
Errors
Occur by either party in recording transactions
Who prepares the reconciliation
To obtain maximum benefit from a bank reconciliation, an employee who has no other responsibilities related to cash should prepare the reconciliation
Depoisits in transit and outstanding checks
are reconciling items because of time lags
Deposits in transit
Deposits recorded by the depositor that have not been recorded by the bank
Outstanding checks
Issued checks recorded by the company that have not been paid by the bank
Alternative terminology for adjusted cash balance
correct cash balance
true cash balance
Electronic fund transfers (EFTs)
Disbursement systems that use wire, telephone, or computer to transfer cash from one locatioin to another
Cash
coins
currency (paper money)
checks
money orders
money on hand or on deposit in a bank
*NOT INCLUDED post-date checks
Cash equivalents
Short-term, highly liquid investments that are both:
- readily convertible to known amounts of cash
- So near their maturity that their market value is relatively insensitive to changes in interest rates
Examples of cash equivalents
Treasury bills
commercial paper (short-term corporate notes)
money market funds
Ethics note: cash equivalents
Companies can make themselves look more liquid by reporting many items as cash equivalent
restricted cash
cash that is not available for general use but rather is restricted for a special purpose
Treasurer
Management of cash is the responsibiliyt of the company treasurer
liquid investment
One with a market in which someone is always willing to buy or sell the investment
risk-free investment
There is no concern that the party will default on its promise to pay its principal and interest
five basic principles of cash management
Increase the speed of receivables collection
Keep inventory levels low
Monitor payment of liabilities
Plan the timing of major expenditures
Invest idel cash
International note: cash management
Corporate treasurers make investments known as hedges to lock in an exchange rate to reduce the company’s exposure to exchange-rate fluctuation
Cash budget
Shows anticipated cash flows, usually over a one- to two-year period
____________ contributes to more effective cash management
A cash budget
Cash receipts section
includes: expected receipts from the company’s principal sources of cash
anticipated receipts of interest and dividends
Operation of a petty cash fund
- establishing the fund
- making mapyments from the fund
- replenishing the fund
2 steps in establishing a petty cash fund
- appointng a petty cash custodian who will be responsible for the fund
- determing the size of the fund
“Slush” funds
are unauthorized and hidden (under the table)
Receipt satisfies two principles:
- establishing responsibility (signature of custodian)
- documentation procedures
