Module 6 Study Guide Flashcards
In accounting, cash includes:
coins;
currency;
undeposited negotiable instruments such as checks, bank drafts, and money orders;
amounts in checking and savings accounts; and
demand certificates of deposit.
Cash controls
control and manage cash
The three elements of an internal control structure are the:
control environment,
accounting system, and
control procedures.
Internal control not only prevents theft and fraud but also serves many purposes:
Companies must implement policies requiring compliance with federal law.
Personnel must perform their assigned duties to promote efficiency of operations.
Correct accounting records must supply accurate and reliable information for the preparation of the financial statements and related reports.
control environment
reflects the overall attitude, awareness, and actions of the board of directors, management, and stockholders.
accounting system
consists of the methods and records that identify, assemble, analyze, classify, record, and report an entity’s transactions to provide complete, accurate, and timely financial information.
control procedures
additional policies and procedures that management establishes to provide reasonable assurance that the company achieves its specific objectives.
five components of an internal control structure
Control Environment: The control environment is the basis for all other elements of the internal control structure. The control environment includes many factors such as ethical values, management’s philosophy, the integrity of the employees of the corporation, and the guidance provided by management or the board of directors.
Risk Assessment: After the entity sets objectives, the risks (such as theft and waste of assets) from external and internal sources must be assessed. Examining the risks associated with each objective allows management to develop the means to control these risks.
Control Activities: To address the risks associated with each objective, management establishes control activities. These activities include procedures that employees must follow. Examples include procedures to protect the assets through segregation of employee duties and the other means we discussed earlier.
Information and Communication: Information relevant to decision-making must be collected and reported in a timely manner. The events that yield these data may come from internal or external sources. Communication throughout the entity is important to achieve management’s goals. Employees must understand what is expected of them and how their responsibilities relate to the work of others. Communication with external parties such as suppliers and shareholders is also important.
Monitoring: After the internal control structure is in place, the firm should monitor its effectiveness so that it can make changes before serious problems arise. In testing components of the internal control structure, companies base their thoroughness on the risk assigned to those components.
Bank statements typically include the following data:
Deposits made to the checking account during the period.
Checks paid out of the depositor’s checking account by the bank during the period. These checks have cleared the bank and are canceled.
Other deductions from the checking account for service charges, NSF (not sufficient funds) checks, safe-deposit box rent, and check printing fees.
Other additions to the checking account from proceeds of a note collected by the bank for the depositor and interest earned on the account.
wire transfer
of funds is an interbank transfer of funds by telephone.
debit memo
a form used by a bank to explain a deduction from the depositor’s account.
credit memo
explains an addition to the depositor’s account.
bank reconciliation
a schedule the company (depositor) prepares to reconcile, or explain, the difference between the cash balance on the bank statement and the cash balance on the company’s books.
certified check
a check written, or drawn, by a depositor and taken to the depositor’s bank for certification.
cashier’s check
a check made out to either the depositor or a third party and written, or drawn, by a bank after deducting that amount from the depositor’s account or receiving cash from the depositor.
