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accounting > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

Three fraud characteristics

A

Opportunity

Financial pressure

Rationalization

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2
Q

fraud

A

a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer

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3
Q

Internal control

A

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

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4
Q

5 primary components of internal controls

A

A control environment

risk assesment

control activities

information and communication

monitoring

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5
Q

Control environment

A

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”

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6
Q

risk assesment

A

Companies must identify and analyze the various factors that create risk for the business and must determine how to manage these risks

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7
Q

control activities

A

to reduce fraud, management must design policies and procedures to address the specific risks faced by the company

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8
Q

Information and communication

A

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

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9
Q

monitoring

A

internal control systems must be monitored periodically for their adequacy

defiencies reported to top management or board of directors

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10
Q

Six principles of control activities

A

Establishment of responsibility

Segregation of duties

Documentation procedures

Physical controls

Independent internal verification

Human resource controls

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11
Q

Control is most effective when ___________________________________

A

Only one person is responsible for a given task

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12
Q

The work of one employee should _____________________________

A

provide a reliable basis for evaluating the work of another employee

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13
Q

Making one individual responsible for related activities increases ___________________________

A

the potential for errors and irregularities

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14
Q

The custodian of the asset is not likely to convert the asset to personal use when ________________________________________

A

one employee maintains the record of the asset, and a different employee has physical custody of the asset

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15
Q

Segregation of duties (accountability for assets)

A

Accounting employee A - maintains cash balances per books

Assistant cashier B - maintains custody of cash on hand

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16
Q

Prenumbered documents

A

Companies should use prenumbered documents, and all documents should be accounted for

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17
Q

Forwarding source documents

A

Employees should promptly forwards source documents for accounting entries to the accounting department

*Helps ensure timely recording of the transaction*

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18
Q

Physical controls

A

Relate to the safeguarding of assets and enhance the accuracy and reliability of the accounting records

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19
Q

independent internal verification

A

Involves the review of data prepared by employees

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20
Q

internal auditors

A

Company employees who continuously evaluate the effectiveness of the company’s internal control systems

recommend improvements when needed

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21
Q

Human resource control activities

A

Bond employees who handle cash

rotate employees’ duties and require employees to take vacations

conduct thorough background checks

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22
Q

bonding

A

involves obtaining insurance protection against theft by employees

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23
Q

Controls may _______________________

A

vary with the risk level of the activity

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24
Q

reasonable assurance

A

Companies generally design their systems of internal control to provide reasonable assurance of proper safeguarding of assets and reliabliyt of the accounting records

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25
human element
factor in every system of internal controls \*employee fatigue, carelessness, or indifference
26
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
27
Cash (internal controls)
Cash is the asset most susceptible to fraudulent activities
28
Internal control over cash disbusrsments
is more effective when companies pay by check, rather than by cash
29
Voucher system
a network of approvals by authorized individuals, acting independently, to ensure that all disbursements by check are proper
30
Voucher
An authorization form prepared for each expenditure in a voucher system
31
voucher register
where vouchers are recorded
32
check register
the paid voucher is sent to the accounting department for recording in the check register
33
Ethics note: petty cash fund strengthend by:
1. having a supervisor make surprise counts of the fund to confirm whether the paid petty cash receipts and fund cash equal the fund amount 2. canceling or mutilating the paid petty cash receipts so they cannot be resubmitted for reimbursement
34
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ contributes significantly to good internal control over cash
The use of a **bank**
35
Bank reconciliation
The process of comparing the bank's balance with the company's balance, and explaining the differences to make them agree
36
canceled check
a paid check (alternative word)
37
Bank statement essentialy
is a copy of the bank's records sent to the customer for periodic view
38
NSF (not sufficient funds) check
A check that is not paid by a bank because of insufficient funds in a bank account
39
bank statement
a statement received monthly from the bank that shows the depositor's bank transactions and balances
40
Reconciling the bank account
Making the balance per books and the balance per bank agree with the true amount
41
Two causes of reconciling the bank account
Time lags Errors
42
Time lags
Prevent one of the parties from recording the transaction in the same period
43
Errors
Occur by either party in recording transactions
44
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
45
Depoisits in transit and outstanding checks
are reconciling items because of time lags
46
Deposits in transit
Deposits recorded by the depositor that have not been recorded by the bank
47
Outstanding checks
Issued checks recorded by the company that have not been paid by the bank
48
Alternative terminology for adjusted cash balance
correct cash balance true cash balance
49
Electronic fund transfers (EFTs)
Disbursement systems that use wire, telephone, or computer to transfer cash from one locatioin to another
50
Cash
coins currency (paper money) checks money orders money on hand or on deposit in a bank \*NOT INCLUDED post-date checks
51
Cash equivalents
Short-term, highly liquid investments that are both: 1. readily convertible to known amounts of cash 2. So near their maturity that their market value is relatively insensitive to changes in interest rates
52
Examples of cash equivalents
Treasury bills commercial paper (short-term corporate notes) money market funds
53
Ethics note: cash equivalents
Companies can make themselves look more liquid by reporting many items as cash equivalent
54
restricted cash
cash that is not available for general use but rather is restricted for a special purpose
55
Treasurer
Management of cash is the responsibiliyt of the company treasurer
56
liquid investment
One with a market in which someone is always willing to buy or sell the investment
57
risk-free investment
There is no concern that the party will default on its promise to pay its principal and interest
58
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
59
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
60
Cash budget
Shows anticipated cash flows, usually over a one- to two-year period
61
\_\_\_\_\_\_\_\_\_\_\_\_ contributes to more effective cash management
A cash budget
62
Cash receipts section
includes: expected receipts from the company's principal sources of cash anticipated receipts of interest and dividends
63
Operation of a petty cash fund
1. establishing the fund 2. making mapyments from the fund 3. replenishing the fund
64
2 steps in establishing a petty cash fund
1. appointng a petty cash custodian who will be responsible for the fund 2. determing the size of the fund
65
"Slush" funds
are unauthorized and hidden (under the table)
66
Receipt satisfies two principles:
1. establishing responsibility (signature of custodian) 2. documentation procedures
67

accounting (31 decks)

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