Chapter 8

Question 1

Internal Control System

Answer 1

Policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations , and uphold company policies

Question 2

Sarbanes-Oxley Act (SOX)

Answer 2

Requires managers and auditors of companies whose stock is traded on an exchange to document and verify internal controls.
Requirements:
- company must have effective internal controls
- auditors must evaluate internal controls
- violators receive harsh penalty (prison & fines)
- auditors’ work is overseen by the Public Company Accounting Oversight Board

Question 3

Deposits in Transit

Answer 3

Deposits made and recorded in the depositor’s book but not yet listed on the bank statement.
(Ex: Night depository; mailed deposits)

Bank Balance Adjustment (+)

Question 4

Outstanding Checks

Answer 4

Checks written by the depositor, subtracted on the depositor’s books, and sent to payees but not yet turned in for payment at the bank statement date

Bank Balance Adjustment (-)

Question 5

Bank Errors

Answer 5

Any errors made by the bank are accounted for in the reconciliation . To find errors, we (a) compare deposits on the bank statement with deposits in the accounting records and (b) compare canceled checks on the bank statement with checks recorded in the accounting records

Bank Balance Adjustment (+/-)

Question 6

Interest Earned and Unrecorded Cash Receipts

Answer 6

Banks sometimes collect notes for depositors. Banks also received electronic funds transfers to the depositor’s account. When a bank collects an item, it is added to the depositor’s account, les any service fee. The bank statement also includes any interest earned.

Book Balance Adjustment (+)

Question 7

Bank Fees and NSF Checks

Answer 7

A company sometimes deposits another party’s check that is uncollectible. This check is called a nonsufficient funds (NSF) check. The bank initially increases the depositor’s account for the check. When the check is uncollectible, the bank reduces the depositor’s account for that check. The bank may charge the depositor a fee for processing an uncollectible check.

Book Balance Adjustment (-)

Question 8

Book Errors

Answer 8

Any errors made by the depositor in the company books are accounted for in the reconciliation. To find errors, we (a) compare deposits on the bank statement with deposits in the accounting records and (b) compare canceled checks on the bank statement with checks recorded in the accounting records

Book Balance Adjustments (+/-)