Accounting 1 Exam 2

Compliance objectives within internal controls focus on...

adhering to laws and regulations.

Contra-account

an account that is an offset to, or reduction of, another account.

Fraud is generally defined as

an attempt to deceive others for personal gain

Explain the oppurtunity aspect of the fraud triangle

an opportunity must exist to commit the fraud which usually stems from weak internal controls.

Operational objectives within internal controls focus on...

completing work efficiently and effectively and protecting assets by reducing the risk of fraud.

What are the internal control components

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

Employee Fraud is often grouped into 3 categories:

corruption, asset misappropriation, financial statement fraud

Deferral adjustments are used to...

decrease balance sheet accounts and increase corresponding income statement accounts.

The primary goal of internal controls for all cash payments is to

ensure that the business pays only for properly authorized transactions.

What are the Principles of Control Activities

establish responsibility, segregate duties, restrict access, document procedures, independently verify

Information and Communication Explained:

generates and communicates information about activities affecting the organization to support sound decision making.

What are the 3 aspects of the fraud triangle

incentive, opportunity, and rationalization

Control Activities Explained:

include various work responsibilities and duties completed by employees to reduce risks to an acceptable level. These activities will be discussed in detail in the upcoming slides.

As of December 31, (the end of the accounting period), ABC Company has a profit before tax of $12,000. The company's tax rate is 25%. The adjustment will include _____ of $______ to Income Tax Payable

increase; 3,000 ($12,000 x 25%)

A bank reconciliation is an...

internal report prepared to verify the accuracy of both the bank statement and the cash accounts of a business or individual.

Depreciation

is the process of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used.

Financial statement fraud involves...

misreporting amount in the financial statements, usually to portray more favorable financial results than what actually exists.

Each deferral adjustment involves...

one asset and one expense account, or one liability and one revenue account

What are the 3 internal control objectives

operations, reporting, compliance

Reporting objectives within internal controls include...

producing reliable and timely accounting information for use by people internal and external to the organization.

Asset misappropriation is...

quite simply, theft (embezzlement). Cash is usually the target, but other assets can be misappropriated

A petty cash system is used to...

reimburse employees for small expenditures they have made on behalf of the organization.

Banks provide important services that help businesses to control cash in several ways:

restricting access, documenting procedures, independently verifying

Internal control consists of...

the actions taken by people t every level of an organization to achieve its objectives

Explain the rationalization aspect of the fraud triangle

the employee committing the fraud must possess personal characteristics that allows them to perceive the misdeed as unavoidable or justified. Fraudsters rationalize their actions through a feeling of personal entitlement, which outweighs moral principles, such as honesty and concern for others.

An expense or revenue has been defered if..

we have postponed reporting it on the income statement until a later period.

The company's records can differ from the bank's records for two basic reasons:

(1) the company has recorded some items that the bank doesn't know about at the time it prepares the statement of account or (2) the bank has recorded some items that the company doesn't know about until the bank statement is examined.

Why are the adjustments important to the preparation of the financial statements?

- Adjustments ensure the revenues the seller has performed of its obligation and expenses incurred are reflected in the income statement - Unadjusted financial statements could present a misleading and incomplete picture of the company's financial results - Adjustments ensure that the balance sheet reports all of the economic resources the company owns and all of the obligations the company owes

Bank Reconciliation Goals:

- Identify the deposits in transit. - Identify the outstanding checks. - Record other transactions on the bank statement and correct your errors.

Independently verify explained:

A business can perform independent verification in various ways. The most obvious is to hire someone (an auditor) to check that the work done by others within the company is appropriate and supported by documentation. Independent verification also can be made part of a person's job or could involve comparing the company's accounting information to information kept by an independent third party such as records issued by the bank.

After posting the adjusting entry to record revenues for which the seller has performed of its obligations but has not yet collected, which account will be increased?

Accounts Receivable

Accounts Payable

Amount owed for supplies purchased on account

Supplies

Amount remaining and reported on the balance sheet

Supplies Expense

Amount used and reported on the income statement

Business can receive cash in 2 different ways:

Receive cash in person at time of sale or receive cash through electronic

Restricting access explained:

Because banks provide a secure place to deposit cash, businesses need to keep only a limited amount of cash on hand, which reduces the risk that it will be stolen or misplaced.

Internal controls can never completely prevent and detect errors and fraud for two reasons:

Benefits must exceed the costs and human error/fraud

Documenting procedures explained:

By processing payments made by check or EFT, banks facilitate and document business transactions.

Independently Verifying explained:

Company accountants can use the statement of account prepared by the bank to double-check the accuracy of the cash records. By comparing these two sets of records and investigating any differences, they can verify that the company's records are accurate or identify necessary adjustments.

The adjusting entry to record depreciation, includes a debit to ______ ______ and a credit to ______ ______.

Depreciation Expense; Accumulated Depreciation

The primary internal control goal for cash receipts is to...

Ensures that the business receives the appropriate amount of cash and safely deposits it in the bank.

Internal control for cash is important for two main reasons:

First, because the volume of cash transactions is enormous, the risk of cash-handling errors is significant. Second, because cash is valuable, portable, and "owned" by the person who possesses it, it poses a high risk of theft.

Risk Management Explained:

Managers should continuously assess the potential for fraud and other risks that could prevent the company from achieving its objectives.

Corruption involves..

Misusing one's position for inappropriate personal gain

Restrict Access Explained:

Some controls involve rather obvious steps such as physically locking up valuable assets and electronically securing access to other assets and information. Companies restrict access to check-signing equipment, require a passcode to open cash registers, and protect computer systems with firewalls. If employees do not need assets or information to fulfill their assigned responsibilities, they are denied access.

Control Environment Explained:

The control environment refers to the attitude that people in the organization hold regarding internal control. It is influenced by the policies that a company's board of directors and senior managers set, their demonstrated commitment to integrity and ethical values, the character of the people they hire, and how they evaluate others. A strong control environment helps employees understand the value of internal controls to their organization's success.

Monitoring Activities Explained:

The internal control system is evaluated often to determine whether it is working as intended. Deficiencies should be communicated to those responsible for taking corrective action, including senior management and/or the board of directors.

Explain the incentive aspect of the fraud triangle

This could be from the pressure to produce pleasing financial results to satisfy loan covenants, increase equity funding, or attract business partners. It could also be that the employee is trying to benefit personally from this fraud such as enhancing job security, increasing personal wealth, and obtaining a bigger paycheck

Segregation of Duties:

This involves assigning responsibilities so that one employee can't make a mistake or commit a dishonest act without someone else discovering it. One employee should not initiate, approve, record, and have access to the items involved in the same transaction.

How often does a bank reconciliation occur and by whom?

This procedure is done monthly, ideally by a company employee whose duties are segregated from recording and handling cash.

After the adjustments have been completed, the adjusted balance in income tax expense account represents...

Total income tax that has been paid or accrued during the period

Establish Responsibility Explained:

Whenever possible, assign each task to only one employee. Doing so will allow you to determine who caused any errors or thefts that occur. That's why retail companies assign a separate cash register drawer to each employee at the beginning of a shift. If two cashiers were to use the same drawer, it would be impossible to know which cashier caused the drawer to be short on cash.

Accrual adjustments are needed when....

a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period.