Module 3: Accounting Cycles Flashcards
What is a test of completeness?
This detects an understatement. Start with the source document and trace to the recorded entry.
Also known as tracing forward.
What is a test of existence?
This detects an overstatement? Start with the recorded entry and vouch back to the source document.
This is also known as vouching or tracing backwards.
How is an accounting system viewed?
Inputs - Processing - Outputs
Source docs - Journals/Ledgers-Financial Information
What is an organization approach to a simulation question pertaining to IC weaknesses?
- Identify the type of transaction cycle.
- Obtain understanding of how the accounting system works by carefully reading the simulation in detail and flowcharting if possible
- Consider PIPS (control activities) - Performance reviews, information processing, physical controls, and segregation of duties
- Recall typical weaknesses for transaction cycle
What are two main functions of controls?
- Preventing misstatements
2. Detecting and correcting misstatements that have occurred, although a particular control may have elements of each
When does inadequate segregation exist?
When one individual is performing two or more of the following:
Authorization, Record keeping, custodianship
What are the accounts affected in the sales journal?
AR, Sales, COGS, Inventory
What are the accounts affected in the cash receipts journal?
Cash, AR
What are the accounts affected in the inventory (purchases journal)?
AP
What are the accounts affected in the cash disbursements journal?
AP, Cash
What are the accounts affected in the payroll journal?
Cash, salary expense, work in process
What are the major controls of sales?
- Credit granted by a credit department
- Sales orders and invoices prenumbered and controlled
- Sales returns are presented to receiving clerk who prepares receiving report which supports prenumbered sales return credit memoranda
What are the major controls of accounts receivable?
- Subsidiary ledger reconciled to control ledger regularly
- Individual independent of receivable posting reviews statements before sending to customers
- Monthly statements sent to all customers
- Write-offs approved by management official independent of recordkeeping responsibility (treasurer is appropriate)
What are the major controls of cash receipts?
- Cash receipts received in mail listed by inds with no recordkeeping responsibility
- the cash goes to cashier
- remittance advices go to accounting - Over the counter cash receipts controlled (cash register tapes)
- Cash deposited daily
- Employees handling cash are bonded
- Lockbox, a post office box controlled by company’s bank at which cash remittances are received.
- Bank rec prepared by individuals independent of cash receipts record keeping
Why is lock box effective as a control?
Company employees have no access to cash and bank employees have no access to the company’s accounting records.
