Test #3 Flashcards
Service companies
sell services rather than physical goods
merchandising companies
sell foods that have been purchased from a supplier
manufacturing compnaies
sell goods that it has made itself
internal controls
• Protect against theft of assets
• Enhance the reliability of accounting information
• Promote efficient and effective operations
• Ensure compliance with applicable laws and
regulations
Limitations of Internal Control
- Cost vs. benefit
* Human error or fraud
5 Common Principles of
Internal Control
- establish responsibility
- segregate duties
- restrict assets
- document procedures
- independently verify
Estblishing responsible
Assign each task to only one
employee
segregate duties
Do not make one employee
responsible for all parts of a
process
restrict assets
Do not provide access to
assets or information unless it
is needed to fulfill assigned
responsibilities
documnet procedies
Prepare documents to show
activities that have occurred
independently verify
Check others’ work
Why put internal control measures in place for cash?
Volume of cash transactions is huge
• Cash is vulnerable to theft b/c it is valuable & portable
• Cash comes in many forms – money or any instrument
banks will accept for deposit and increase co.’s account
(i.e. cash equivalents – short-term, highly liquid
investments maturing within 3 months)
Primary goal of internal control for cash receipts
is to
ensure that the business receives the appropriate
amount of cash and safely deposits it in the bank
cheques received by mail are processed in the
same way as cash receipts except that instead of using a
cash register, a clerk opens the mail and lists the
amounts received on a cash receipt list
EFT
cash received electronically via electronic fund
transfers (EFTs) are is deposited directly into the
company’s bank account and only needs a journal entry
to record it
Bank Procedures and Reconciliation
Common for the balance on the bank statement and
the balance in the cash account in the books to be
different
Remember – the bank statement the bank sends you is
prepared from the bank’s point of view (so while the
business considers cash in the bank as an asset (debit),
the bank will see it as a liability (credit)
• Bank Reconciliation
– is an internal report prepared to
verify the accuracy of both the bank statement and the
cash accounts
Bank Reconciliation
Compare the activity listed on the bank statement with
the activity listed in the company’s cash account and
account for any differences
• Common order of analysis
1) Identify any deposits in transit
2) Identify any outstanding cheques
3) Record other transactions on the bank statement
including interest received, EFTs, NSF cheques and
service charges
4) Determine the impact of errors
