Chapter 7: Internal Controls and Cash Flashcards
What is cash?
Resources such as coins, currency, cheques, money orders, traveller’s cheques, and money on deposit in a bank or similar depository
What does cash not include?
- Cheques that are payable in the future (post-dated)
- Cheques that are more than six months old (stale-dated)
- Cheques that are returned (NSF - not sufficient funds)
What are cash equivalents?
Highly liquid (easily sold), short-term investments with maturities of three months or less that are subject to an insignificant risk of changes in value
What are the risks associated with cash?
Frauds and errors may easily occur when cash is handled and recorded. Safeguarding and ensuring the accuracy of accounting records is critical
Why does fraud occur?
1) Opportunity: Opportunities occur when the workplace lacks sufficient controls to detect fraud
2) Motivation: Financial problems, excessive lifestyles
3) Rationalization: Employees may believe they are underpaid
What are internal controls?
The related methods and measures that management adopted within a company to help it achieve:
reliable financial reporting, effective an efficient operations, compliance with relevant laws and regulations
What is an effective way to detect and prevent fraud?
Internal controls
What do good internal control systems have?
1) Control environment
2) Risk assessment
3) Control activities
4) Information and communication
5) Monitoring
What results for a business that has weak internal controls?
- Errors in its records
- Vulnerable to fraud, theft, and costly losses
What are the objectives of internal control?
1) Safeguarded assets
2) Accurate information
3) Compliance with laws and regulations
What are some facts about control activities
- Control activities are the backbone of the company’s efforts to address the risks it faces
- Control activities vary depending on management’s assessment of the risks faced
- It is heavily influenced by the size and nature of the company
What are the six control activities?
1) Establishment of Responsibility
2) Segregation of Duties
3) Documentation Procedures
4) Physical and IT Controls
5) Independent checks of performance
6) Human Resource controls
What is Establishment of Responsibility?
Ensuring only one person as responsibility for a task
e.g. cash register sign-on
IT system log-on
What are Segregation of Duties?
Different individuals should be responsible for related activities
e.g. custody, authorization, recording
What are Documentation Procedures?
All procedures should be documented, pre-numbered, and original documents are used for data entry
What are Physical and IT Controls?
Provides reasonable assurance
e.g. safes, vaults, passwords, computers
What are independent checks of performance?
Independent checks of performance
e.g. internal reviews, internal and external audit
- Review should be done periodically or by surprise
- Review should be done by someone independent of the employee
- Discrepancies and exceptions reported to management
What are human resource controls?
- Bonding employees who handle cash
- Rotating employees’ duties and requiring employees to take vacation
- Conducting thorough background checks
What are the limitations of internal control?
Internal control can only provide reasonable assurance that assets are safeguarded and records are reliable.
Limitations include:
- Cost/benefit
- Human element
- Collusion
- Size of business
What is fraud?
An intentional act to misappropriate (steal) assets or to misstate financial statements
Examples of miststatements:
- Recording expenses as assets
- Overstating useful lives of assets
- Recording revenues that do not exist
What causes many high-profile collapses of companies?
Fraud
What are over the counter receipts?
Includes customers making payments on account and all sales
What are cash receipts in the mail?
Customers making payments on account
What are electronic receipts by eft, debit and credit
Includes customers making payments on account and all sales
Automatic payments are encouraged:
- Cost less than cheques in the mail
- Enhanced internal control
- Automatic transactions reduce late payments
