Chapter 7 Internal Control and Cash

Question 1

what is internal control and how can it be used to protect a company’s assets?

Answer 1

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.

Question 2

what are the 5 components of internal control?

Answer 2

control procedures, risk assessment, information system, monitoring of controls, and environment

Question 3

what are the internal control procedures with respect to cash receipts?

Answer 3

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

Question 4

what are the internal control procedures with respect to cash payments?

Answer 4

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

Question 5

how can a petty cash fund be used for internal control purposes?

Answer 5

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

Question 6

how can the bank account be used as a control device?

Answer 6

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

Question 7

How can the cash ratio be used to evaluate business performance?

Answer 7

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

Question 8

what is an account number?

Answer 8

on a check, the number that identifies the account upon which the payment is drawn

Question 9

what is bank reconciliation?

Answer 9

a document explaining the reasons for the difference between a depositor’s cash records and the depositor’s cash balance in its bank account.

Question 10

what is a bank statement?

Answer 10

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

Question 11

what are canceled checks?

Answer 11

physical or scanned copies of the maker’s cashed (paid) checks

Question 12

what is cash equivalent?

Answer 12

a highly liquid investment that can be converted into cash in three months or less

Question 13

what is a cash ratio?

Answer 13

a measure of a company’s ability to pay current liabilities from cash and cash equivalents: (Cash + cash equivalents) / Total current liabilities

Question 14

what is a check?

Answer 14

a document that instructs a bank to pay the designated person or business a specified amount of money

Question 15

what is a collusion?

Answer 15

two or more people working together to circumvent internal controls and defraud a company

Question 16

what is credit memorandum?

Answer 16

an increase in a bank account

Question 17

what is a debit memorandum?

Answer 17

a decrease in a bank account

Question 18

what is a deposit in transit?

Answer 18

a deposit recorded by the company but not yet by its bank

Question 19

what is a deposit ticket?

Answer 19

a bank form that is completed by the customer and shows the amount of each deposit

Question 20

what is electronic data interchange (EDI)?

Answer 20

a streamlined process that bypasses paper documents altogether, computers of customers communicate directly with the computers of suppliers to automate routine business transactions

Question 21

what is an electronic funds transfer (EFT)

Answer 21

a system that transfers cash by electronic communication rather than by paper documents

Question 22

what is encryption?

Answer 22

rearranging plain-text messages by a mathematical process - the primary method of achieving security in e-commerce

Question 23

what is an evaluated receipts settlement?

Answer 23

a procedure that compresses the payment approval process into a single step by comparing the receiving report to the purchase order

Question 24

what is an external auditor?

Answer 24

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

Question 25

what is a firewall?

Answer 25

a device that enables members of a local network to access the network, while keeping nonmembers out of the network

Question 26

what is an imprest system?

Answer 26

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

Question 27

what is an internal auditor?

Answer 27

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

Question 28

what is internal control?

Answer 28

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

Question 29

what is an internal control report?

Answer 29

a report by management describing its responsibility for and the adequacy of internal controls over financial reporting

Question 30

what is a lock-box system?

Answer 30

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

Question 31

what is a maker?

Answer 31

the party who issues the check

Question 32

what is a nonsufficient funds check (NSF)?

Answer 32

a check for which the maker’s bank account has insufficient money to pay the check

Question 33

what is an outstanding check?

Answer 33

a check issued by a company and recorded on its books but not yet paid by its bank

Question 34

what is a payee?

Answer 34

the individual or business to whom the check is paid

Question 35

what is petty cash?

Answer 35

a fund containing a small amount of cash that is used to pay for minor expenditures

Question 36

what is a public company?

Answer 36

a company that sells its stock to the general public

Question 37

what is remittance advice?

Answer 37

an optional attachment to a check that tells the business the reason for the payment

Question 38

what is a routing number?

Answer 38

on a check, the 9 digit number that identifies the bank upon which the payment is drawn

Question 39

what is the Sarbanes-Oxley Act?

Answer 39

requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports

Question 40

what is separation of duties?

Answer 40

dividing responsibility between two or more people to limit fraud and promote accuracy of accounting records

Question 41

what is a signature card?

Answer 41

a card that shows each authorized person’s signature for a bank account

Question 42

what is timing difference?

Answer 42

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

Question 43

what is a voucher?

Answer 43

a sequentially numbered document authorizing a cash payment