Kimmel Chapter 7 (Internal Control and Cash)

Question 1

What are the 5 control activities that apply to most companies?

Answer 1

1. Assignment of responsibility
2. Segregation of duties
3. Documentation
4. Physical controls
5. Review and reconciliation

Question 2

Explain the purpose of:

Assignment of Responsibility

Answer 2

Enables responsibility to be assigned to specific employees, making them accountable forcarrying a task out appropriately

Question 3

Explain the purpose of:

Segregation of Duties

Answer 3

When the same individual is responsible for authorization, recording, and asset custody, the potential for fraud increases

Question 4

Explain the purpose of:

Documentation

Answer 4

Using original documents ensures timely and accurate recording of transactions
* Photocopies increase the risk of duplicate entries

Question 5

Explain the purpose of:

Physical controls

Answer 5

Used to safeguard assets and enhance the accuracy and reliability of accounting records
* Safes, vaults and safety deposit boxes for cash and business papers
* Locked warehouses
* Computer facilities requiring password, fingerpint, or eyeball scan
* Alarms
* Security cameras
* Time-tracking systems

Question 6

Explain the purpose of:

Review and Reconciliation

Answer 6

Includes internal reviews, external reviews

Question 7

What are the limitations of internal control?

Answer 7

1. Cost/benefit considerations
2. Human error
3. Collusion
4. Management override

Question 8

What transactions might the bank not know?

Answer 8

• Deposits in transit
• Outstanding cheques
• Bank errors

Question 9

What transactions might the company not know?

Answer 9

• Collections made by the bank
• NSF cheques
• Services charges
• Company errors
• Interest earned on account