Chapter 7 Internal Control and Cash Flashcards
what is internal control and how can it be used to protect a company’s assets?
internal control is the organizational plan and all the related measures designed to safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting records
the Sarbanes-Oxley act was passed by congress to revamp corporate governance in the U.S.
what are the 5 components of internal control?
control procedures, risk assessment, information system, monitoring of controls, and environment
what are the internal control procedures with respect to cash receipts?
a point-of-sale terminal provides control over cash receipts over the counter
companies control cash by mail by ensuring appropriate separation of duties when handling cash and recording the transaction
what are the internal control procedures with respect to cash payments?
good separation of duties between operations of the business and writing checks for cash payments should exist
a voucher system can be used to control cash payments
how can a petty cash fund be used for internal control purposes?
a petty cash fund allows a business to keep cash on hand to pay for small miscellaneous items such as postage, office supplies, and taxi fare
when the pcf is opened, the company records a debit to petty cash and a credit to cash
the fund is replenished by debiting the associated asset and expense accounts and crediting cash
discrepancies in pcf’s are either debited or credited to the cash short & over account
how can the bank account be used as a control device?
bank accounts provide established practices that safeguard a business’s money. these controls include use of signature cards, deposit tickets, checks, bank statements, and electronic funds transfers
A bank reconciliation compares and explains the differences between cash on the company’s books and cash according to the bank’s records on a specific date
after the bank reconciliation has been prepared, journal entries must be completed for all items on the book side of the bank reconciliation
How can the cash ratio be used to evaluate business performance?
the cash ratio measures a company’s ability to pay its current liabilities from cash and cash equivalents. Cash ratio = (cash + cash equivalent) / Total current liabilities
what is an account number?
on a check, the number that identifies the account upon which the payment is drawn
what is bank reconciliation?
a document explaining the reasons for the difference between a depositor’s cash records and the depositor’s cash balance in its bank account.
what is a bank statement?
a document from the bank that reports the activity in the customer’s account. It shows the bank account’s beginning and ending balances and lists the month’s cash transactions conducted through the bank account
what are canceled checks?
physical or scanned copies of the maker’s cashed (paid) checks
what is cash equivalent?
a highly liquid investment that can be converted into cash in three months or less
what is a cash ratio?
a measure of a company’s ability to pay current liabilities from cash and cash equivalents: (Cash + cash equivalents) / Total current liabilities
what is a check?
a document that instructs a bank to pay the designated person or business a specified amount of money
what is a collusion?
two or more people working together to circumvent internal controls and defraud a company
what is credit memorandum?
an increase in a bank account
what is a debit memorandum?
a decrease in a bank account
what is a deposit in transit?
a deposit recorded by the company but not yet by its bank
what is a deposit ticket?
a bank form that is completed by the customer and shows the amount of each deposit
what is electronic data interchange (EDI)?
a streamlined process that bypasses paper documents altogether, computers of customers communicate directly with the computers of suppliers to automate routine business transactions
what is an electronic funds transfer (EFT)
a system that transfers cash by electronic communication rather than by paper documents
what is encryption?
rearranging plain-text messages by a mathematical process - the primary method of achieving security in e-commerce
what is an evaluated receipts settlement?
a procedure that compresses the payment approval process into a single step by comparing the receiving report to the purchase order
what is an external auditor?
an outside accountant, completely independent of the business, who monitors the controls to ensure that the financial statements are presented fairly in accordance with GAAP
what is a firewall?
a device that enables members of a local network to access the network, while keeping nonmembers out of the network
what is an imprest system?
a way to account for petty cash by maintaining a constant balance in the petty cash account. at any time, cash plus petty cash tickets must total the amount allocated to the petty cash fund
what is an internal auditor?
an employee of the business who ensures the company’s employees are following company policies, that the company meets all legal requirements, and that operations are running efficiently
what is internal control?
the organizational plan and all the related measures adopted by an entity to safeguard assets, encourage employees to follow company policies, promote operational efficiency and ensure accurate and reliable accounting records
what is an internal control report?
a report by management describing its responsibility for and the adequacy of internal controls over financial reporting
what is a lock-box system?
a system in which customers send their checks to a post office box that belongs to a bank. a bank employee empties the box daily and records the deposits into the company’s bank account
what is a maker?
the party who issues the check
what is a nonsufficient funds check (NSF)?
a check for which the maker’s bank account has insufficient money to pay the check
what is an outstanding check?
a check issued by a company and recorded on its books but not yet paid by its bank
what is a payee?
the individual or business to whom the check is paid
what is petty cash?
a fund containing a small amount of cash that is used to pay for minor expenditures
what is a public company?
a company that sells its stock to the general public
what is remittance advice?
an optional attachment to a check that tells the business the reason for the payment
what is a routing number?
on a check, the 9 digit number that identifies the bank upon which the payment is drawn
what is the Sarbanes-Oxley Act?
requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports
what is separation of duties?
dividing responsibility between two or more people to limit fraud and promote accuracy of accounting records
what is a signature card?
a card that shows each authorized person’s signature for a bank account
what is timing difference?
difference that arises between the balance on the bank statement and the balance on the company’s books because of a time lag in recording transactions
what is a voucher?
a sequentially numbered document authorizing a cash payment
