Lecture 4 - Ethics, Internal Control, and Cash and Receivables (Chapter 5) Flashcards
Fraud, debtors and creditors, internal control, "bad debt" expenses
Account for the fraud triangle.
- Pressure - the reason for committing fraud
- Opportunity - the ability to commit and conceal the fraud
- Rationalization - the justification for why the fraud is acceptable
What’s a budget?
A financial plan for the future.
What’s an audit?
An examination of financial records to ensure that the information is accurate and in accordance with accounting standards.
What’s the most liquid asset?
Cash.
What’s another word for debtor?
“borrower”.
What’s another word for creditor?
“lender”.
True or false: the debtor has a note receivable.
False (the debtor has a note payable)
True or false: the creditor has a note payable.
False (the creditor has a note receivable)
What does accounting fraud entail?
Accounting fraud usually begins with the pressure to meet financial targets and is defined as “an intentional misrepresentation of facts”.
What’s the most effective way of reporting fraud?
Whistleblowing.
What does the term “corporate governance” refer to?
It refers to a set of organizational practices that aim at clarifying a company’s corporate direction and the management’s responsibility and accountability.
What’s the most important internal control mechanism?
The “dual control” principle.
Account for the “dual control” principle.
“It’s an internal control mechanism that aims at preventing fraud and errors. It involves requiring two or more individuals to be involved in completing a critical task.” (ChatGPT)
Provide examples of safety nets.
Internal control (mechanisms), corporate governance, external auditors, and financial analysts.
What are cash equivalents?
Short-term investments that are highly liquid.
What type of asset are cash equivalents?
A type of short-term/current asset.
Provide examples of highly-liquid assets.
Cash, short-term investments, and receivables.
How are receivables mainly acquired?
By selling goods and services to customers (accounts receivable).
What does it mean when a company has “bad debt” expenses?
It happens when an account receivable is uncollectible, i.e. when a customer doesn’t pay.
Account for the direct write-off method.
Recognize a “bad debt” expense when it becomes clear that a receivable can’t be collected (paid).
Account for the allowance method.
- Estimate a “bad debt” expense
- Record the expense along with a corresponding allowance for doubtful accounts
- When a receivable is confirmed to be uncollectible (payable), write it off and reduce the allowance accordingly
