Exam 3

Question 1

Principles of Internal Control

Answer 1

1. Establish responsibilities
2. Maintain adequate records
3. Insure assets and bond key employees
4. Separate recordkeeping from custody of assets
5. Divide responsibilit for related transactions
6. Apply technological controls
7. Perform regular and independent reviews

Question 2

Internal control system

Answer 2

1. Protect assets
2. Promote efficient operations
3. Ensure reliable accounting
4. Urge adherence to company policies

Question 3

Requirements of Sarbane-Oxley Act (SOX)

Answer 3

1. Auditors must evaluate internal controls and issue an internal control report
2. Auditors of a lient are restricted as to what consulting services they can provide that client
3. The person leading an audit can serve no more than seven years without a two-year break
4. Auditors’ work is overseen by the Public Company Accounting Oversight Board (PCAOB)
5. Harsh penalties exist for violators-sentences up to 25 years in prison with severe fines
6. Section 404 requires managers document and assess the effectivesness of all internal control processes that can impact financial reporting

Question 4

COSO

Answer 4

Committee of Sponsoring Organizations - Provides a framework for the seven principles of internal control to improve the quality of financial reporting

Question 5

Five aspects of internal control

Answer 5

1. Control activiites
2. Control environment
3. Risk assessment
4. Monitoring
5. Communication

Question 6

Triple threat of fraud

Answer 6

1. Opportunity - refers to internal control deficiencies in the workplace
2. Pressure - refers to financial, family, society, and other stresses to succeed
3. Rationalization - refers to employees justifying fraudulent behavior

Question 7

Control of cash

Answer 7

1. Handling cash is separate from recordkeeping of cash
2. Cash receipts are promptly deposited in the bank
3. Cash disbursements are made by check

Question 8

Liquidity

Answer 8

Refers to a company’s ability to pay for its near-term obligations

Question 9

Liquid assets

Answer 9

Cash and similar assets that can be readily used to settle near-term obligations

Question 10

Cash

Answer 10

Currency and coins, along with the amounts on deposit in bank accounts, checking accounts (demand deposits), and many savings accounts (time deposits), customer checks, cashier’s checks, certified checks, and money orders

Question 11

Cash equivalents

Answer 11

Short-term, highly liquid investment assets meeting two criteria:

1. Readily convertible to a known cash amount
2. Sufficiently close to their due date so that their market value is not sensitive to interest rate changes - generally only investment purchased within three months of their due date

Examples: U.S. Treasury bills and money market funds

Question 12

Effective cash management

Answer 12

1. Plan cash receipts to meet cash payments when due
2. Keep a minimum level of cash necessary to operate
3. Encourage prompt collection of receivables

Question 13

Cash management principles

Answer 13

1. Encourage collection of receviable
2. Delay payment of liabilities
3. Keep only necessary levels of assets
4. Plan expenditures
5. Invest excess cash

Question 14

Control of cash receipts

Answer 14

1. Over-the-counter
2. By mail

Question 15

Over-the-Counter Cash Receipts

Answer 15

1. Starts with clerk ringing cash sales on a register.

2 After preparing a cash count sheet, the cash and cheet are turned over to a cashier, who prepares cash records, deposit slip, and journal entry

3. A supervisor conpares the record of total register transactions with the cash receipts reported by the cashier

Question 16

Cash over and short

Answer 16

When errors are made in cash handling, the difference is reported to this account.

It is reported under general and administrative expenses as miscellaneous expenses, or miscellaneous revenues if it has a credit balance

Overage:

Cash 1000

     Cash Over and Short                100

     Sales                                           900

Shortage:

Cash 1000

Cash Over and Short 100

      Sales                                           1000