chapter 7 Flashcards
what are internal controls?
systems adopted within a company to help it achieve reliable financial reporting, effective and efficient operations and compliance with relevant laws and regulations
can internal controls help prevent and detect errors?
yes, they help prevent unintentional misstatements
can internal controls help prevent and detect fraud?
yes
what is an example of physical internal controls?
locking inventories
can internal controls be bypassed?
yes people can violate the controls to get what they want
what are the 5 primary components of internal controls?
control environment
risk assessment for the organizations
control activities, limit exposure to risk
information and communication
monitoring activities
what are 5 kinds of control activities?
assignment of responsibility
segregation of duties
documentation
physical controls
review and reconciliation
what determines what control activities a company will use?
the risks they are facing, management assessment and the size and nature of the company
what is assignment of responsibility?
responsibility should be assigned to be specific employees, making them accountable for carrying out a task appropriately
what is an example of assignment of responsibility?
each cashier has a responsibility for their own cash drawer
what is segregation of duties?
responsibility for authorization and recording of transactions and custody of assets should be assigned to different individuals
what is an example of segregation of duties?
all purchasing activities (ordering, approving, receiving and authorizing payment) should not be carried out by the same employee
what is documentation?
evidence that transactions and events have occurred at specific times and specified amounts
what is an example of documentation?
shipping documents indicating goods have been shipped
what is an important part of documentation?
never do anything without proper documentation
what are physical controls?
safeguarding of assets and enhancing the accuracy and reliability of accounting records
what is an example of physical controls?
computer passwords, building alarms, security cameras, safes, vaults
what is review and reconciliation?
data prepared by employees should be subject to independent review, both internal and external
what is an example of review and reconciliation?
reconciliation involves the comparison between two or more documents
do internal controls have limitations?
yes, they can only provide reasonable assurance that assets are safeguarded and records are reliable
what are the 4 limitations to internal controls?
cost/ benefit considerations
human error
collusion (2 people working together to do something bad)
management override
what is fraud?
an intentional act to misappropriate (steal) assets or to misstate financial information
what are 3 examples of misstatements?
recording expenses as assets
overstating useful lives of assets
recording revenues that do not exist
when is fraud most likely to occur?
when the 3 factors in the fraud triangle is present
what are the 3 factors of the fraud triangle?
opportunity
financial pressure
rationalization
what is the factor “opportunity” in the fraud triangle?
opportunity is the opportunity to commit fraud
what is an example of “opportunity”?
seeing a stack of blank signed paycheques to be filled out and cashed in yourself
what is the factor “financial pressure” in the fraud triangle?
people might need money so they steal because they need the money for somthing
what is an example of ‘financial pressure”?
someone stealing because they can’t feed their children
what is the factor “rationalization” in the fraud triangle?
making reasons why it is okay to commit fraud
what is an example of “rationalization”?
someone stealing money and telling themself they are going to pay it back
is cash highly susceptible to theft?
yes
what is cash?
coins, currency, cheques, money order, money on hand or in bank
what is the general rule for determining what is cash?
if bank will accept it for deposit, it is considered cash
when are control activities over cash receipts most effective?
when cash receipts are deposited into the bank account daily or are made by electronic funds transfer
when are control activities over cash payments more effective?
when payments are made by cheque or by electronic funds transfer, rather than cash
how does a company safeguard cash?
by depositing a it in a bank rather than keeping cash on hand
what is the benefit of depositing cash in the bank?
it provides a second record of transactions
one by the bank and one by the company , than these 2 accounts can be reconciled
what are the 5 things online banking allows companies to do?
transfer funds between accounts
make online payments for invoice, payroll or taxes
deposit cheques online
view account transactions and balance details at any time
download transactions directly, facilitating bank reconciliations
what can cause some differences between company records and bank statements?
timing differences that result in one of the parties recording the transaction before the other is aware of it
what are the 6 principles of cash management?
increase the speed of receivables collection
keep inventory low
take advantage of credit periods
plan timing of major expenditures
invest idle cash
prepare a cash budget
do you journalize any entries on the bank side when doing bank reconciliation journal entries?
no
where do you report cash on statements?
on the statement of cash flows and statement of financial position
what is cash combined with when being reported on financial statements?
cash equivalents
what are cash equivalents?
short-term highly liquid held-for-trading investments that are subject to insignificant risk of changes in value ( anything maturing is 90 days or less)
if cash is in a deficit or overdraft at year end, how is it reported?
it is reported as a current liability called bank indebtedness
what are the journal entries to report a negative cash balance or bank indebtedness?
dn cash
cr bank indebtedness
