ACC 131- chapter 4

a companys internal control system must be designed and maintained by its external auditors

false

which one of the following would never be considered a cash equivalent

common stock issued by a corporation

what are the 3 areas company's objectives are being met

effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations

control environment

foundation of the internal control system and it is the collection of environmental factors that influence the effectiveness of control procedures

reconciliation

separately maintained records serves two purposes and as a control function by identifying errors and providing an inspection of detailed records that deters theft, as a transaction detection function by identifying transactions performed by the bank so the business can make necessary entries in its records

are the accounting system and internal control system one integrated system designed to meet the needs of a particular business

yes

differences between the cash account balance and the bank balance develop from 3 sources

1. transactions recorded by the business but not recorded by the bank in time to appear on the current bank statement 2. transactions recorded by the bank but not yet recorded by the business 3. errors in transactions on either set of records

service charges are fees charged by the bank for checking account services

true

the establishment of a petty cash fund has no effect on the company's total cash balance

true

internal control systems include

all the policies and procedures to provide reasonable assurance that the company's objectives are being met in the 3 areas

risk assessment

also called enterprise risk management and are designed to identify, analyze, and manage strategic risks and business process risks

deposit in transit

amount received and recorded by the business but which has not been recorded by the bank in time to appear on the current bank statement and can cause the bank balance to be smaller than the business's cash account balance

reconciliation of accounting records to bank statement

banks and companies accounting records often disagree due to timing differences, records must be reconciled to ensure that the accounting records are consistent with the bank's accounting records

accounting and reporting cash

cash is not only currency and coins, includes savings and checking accounts and negotiable instruments like checks and money orders, when cash is received a cash account is increased by a debit and when cash is paid out a cash account is decreased by a credit

outstanding checks

check issued and recorded by the business that has not been cashed by the recipient of the check and cause the bank balance to be higher than the business's cash account balance

non sufficient funds

check that has not been returned to the depositor because funds in the issuer's account are not sufficient to pay the check

components of internal control

clearly defined authority and responsibility, segregation of duties, adequate documents and records, safeguards over assets and records such as physical protection of the assets, and checks on recorded amounts

accounting system

consists of the methods and records used to identify, measure, record, and communicate financial information about a business

credit memo

could result if the bank collected a note receivable for the business

a check written by a company but not yet presented to the bank for payment is called a check in transit

false

an accounting system must be computerized in order to ensure the company has proper internal control

false

cash equivalents typically appear in the long-term investments section of a balance sheet

false

if a company has an internal audit function it does not need to have external auditors

false

if a company hires honest employees and its top management acts with integrity, no internal control procedures will be necessary

false

no special internal control procedures are necessary with a petty cash fund because the amount is so small

false

the sole purpose for creating an internal control system is to deter embezzlement

false

cash controls

internal controls protect all assets, more liquid an asset the more easily it is converted into cash and get stolen

business process risks

internal processes of the company and how the company allocates its resources to meet its objectives and some of the more common ones are materials, acquisition, production, logistics, distribution, branding, marketing, and human resources

debit memo

might result if the bank makes a prearranged deduction from the business's account to pay a bill

where is cash reported

on both the balance sheet and the statement of cash flows

2 types of transactions recorded by the business but not recorded by the bank in time to appear on the current statement

outstanding checks and deposit in transit

the stronger the system of internal control the higher the accuracy of the company's accounting records and financial reports

true

control environment includes the following

philosophy and operating style of management, personnel policies and practices of the business, overall integrity, attitude, awareness, and actions of everyone in the business concerning the importance of control

control activities

policies and procedures top management establishes to help insure that its objectives are met and control activities can be identified with one of 5 categories

errors in recording transactions

represent yet another source of difference between a business's cash account balance and the bank balance

forces such as competitors and customers

substitute products or services, suppliers, and threat of new competitors or factors such as political economic social and technological

what does the balance sheet typically report

the amount of cash and cash equivalents available at the balance sheet date

following internal controls help businesses effectively control cash

the authority to collect, hold, and pay cash must be clearly assigned to specific individuals, cash-handling and record-keeping activities should be assigned to different individuals, cash records should be examined by an objective party for evaluating the performance of cash-handling activities, controls should be supported by a record keeping system, and cash must be safeguarded vaults and banks

amount of the fee is not known to the business until

the bank statement is received

the committee of sponsoring organizations of the tread way commission established 5 components of internal control

the control environment, risk assessment, control activities, information and communication, and monitoring activities

strategic risks

threats to the organization's success in accomplishing its objectives and are external

errors are inevitable in any accounting system and should be corrected as soon as discovered (T/F)

true

in addition an effort should be made to determine the cause of any error as a basis for corrective action (T/F)

true