acct 230 exam 3

Risk Assessment

A carful consideration of internal and external risk factors.

Framework for Internal Control

A companies plan to safeguard a company's assets and improve the accuracy and reliability of accounting information.

Operating cash flows plus investing cash flows

A company's free cash flow is calculated as:

Inventory

A current asset

Control Activities

A variety of policies and procedures used to protect a company's assets

Assets of the company representing the amount owed by customers

Accounts receivable are best described as:

Hiring of Auditor

Audit firms are hired by the audit committee of the board of directors of the company

Conflicts of interest

Audit firms are not allowed to audit public companies whose chief executives worked for the audit firm

Retention of work papers

Auitors of public companies must retain all work papers for 7 years or face prison

Deposits outstanding

Cash receipts of the company that have not been added to the bank's record of the company's balance

Checks outstanding

Checks the company has written that have not been subtracted from the bank's record of the company's balance

Detective controls

Control activity designed to detect errors or fraud that already have occurred

Preventative controls

Control activity designed to keep errors and fraud from occurring in the first place

Understate cost of goods sold

Corp overstates its ending inventory amount. What effect will this have on the reported amount of cost of goods sold?

credit Cash $2000

Corp. discovered $2000 for an NSF check in it's bank reconciliation. Recording the adjustment to cash would include:

No entry is recorded for the company's books

Corp. noticed that a check written by the company for utility expenses in the amount of $1000 was incorrectly recorded by the bank as $1100. What entry needs to be recorded to correct this error?

Corporate executive accountability

Corporate executives must personally certify the company's financial statements and disclosures

NSF checks

Customer's checks written on nonsufficient funds/ bad checks

Newest

FIFO inventory method assumes that units remaining in ending inventory are ______ units purchased.

Fictitious revenue from fake customers Improper asset valuation Mismatching revenues and exspenses

Fraudulent reporting by management could include:

1) operating activities 2) investing activities 3) financial activities

From the statement of cash flows, investors know a company's cash inflow and cash outflows relate to:

Cash receipts

Important controls include separation of duties for those who handle cash and independent verification

Cash disbursements

Important controls including payment by checks, credit card, debit card, separation of duties and various authorization and documentation procedures

Deposit outstanding

In a bank reconciliation, what does not need to be recorded to adjust the company's cash balance?

Deducted from the bank balance

In bank reconciliation, an outstanding check is:

Added to the book balance

In bank reconciliation, electronic funds transfer received by the bank from a customer's note receivable owed to the company is ________.

Cash Equivalents

Investments that mature within three months from that date of purchase

Inventory

Items currently in production fro future sale Items held for resale Items used currently in production of goods to be sold

Sarbanes-Oxley Act of 2000

Legislation passed by the U.S. Congress to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise, as well as improve the accuracy of corporate disclosures.

produce goods

Manufacturing firms

Bank reconciliation

Matches the balance of cash in the bank account with the balance of cash in the company's records

finished form

Merchandising companies purchase inventory in

Components of internal control

Monitoring Control Activities Risk Assessments Control Environment

Fraud triangle

Motive, Rationalization, Opportunity

Collusion

Occurs when two or more people act in coordination to circumvent internal controls

Cash flows

Only transactions involving cash affect a company's:

Payment for employee salaries

Operating cash flows include:

Oversight board

PCAOB Has the authority to establish standards dealing with auditing, quality control, ethics, independence. Consists of 5 members.

External risks

Risks that are outside the control of the project team and its host organization

Internal risks

Risks to the project that may involve the financial solvency of the company, the ability for the company to have required equipment and other resources on hand in time to support the project

Internal Control

Section 404 requires that company management and auditors to document at assess the effectiveness of a companies success.

Cost of products sold Cost of merchandise sold Cost of Sales

Some companies refer to cost of goods sold as:

Increased regulations related to auditor-client relations Increased regulations related to internal control Increased regulations related to corporate executive accountability

The Sarbanes-Oxley Act mandates what?

Expenses (Bad debt) are not properly matched with the revenues (credit sales) they help to generate

The direct write-off method is generally not permitted for financial reporting purposes because:

Auditor Rotation

The lead auditor in charge of auditing a particular company must rotate off that company within 5 years

Provide cash on hand for minor expenditures

The purpose of a petty cash fund is:

Responsibilities for Internal Control

The top executives are the ones who must take final responsibility for their establishment and success.

Occupational Fraud

The use of one's occupation for personal enrichment through the deliberate misuse of misapplication of the employer's recourses.

Added to the book balance

This months bank statement shows interest earned of $45, How would this item be treated on the bank reconciliation?

Petty Cash Funds

To pay for minor purchases, companies keep some cash on hand

Nonaudit services

Unlawlful for the auditors of public companies to also perform certain nonaudit services such as consulting for their customers

asset: balance sheet

Unsold inventory is ________ in the _________

Debit purchases; Credit accounts payable

Using a periodic inventory system, the purchase of inventory on account would be recorded as:

Debit inventory; Credit Accounts Payable

Using a perpetual inventory system, the purchase of inventory on account would be recorded as:

A debit to Allowance for Uncollectable Accounts

Using the allowance method, the entry to record a write-off of accounts receivable will include:

Both manufacturing and merchandising companies

What companies earn revenue by selling inventory?

Merchandising

What companies purchase inventory that is primarily in finished form and ready for resale to customers

Check's outstanding

What factor adjusts the bank's balance of cash in a bank reconciliation?

Interest earned

What factor adjusts the company's balance of cash in a bank reconciliation?

FIFO

What inventory cost flow assumption generally results in lowest reported amount for cost of goods sold when inventory costs are rising?

Checks received from customers

What is considered cash for financial reporting purposes?

Employee fraud is less likely to occur when asses to assets and asses to accounting records are separated

What is the concept behind separation of duties in establishing internal control?

Gross profit

What level of profitability in a multi-step income statement represents revenues from the sale of inventory less the cost of that inventory?

Requiring the employee receiving the cash from the customer to also deposit the cash into the company's bank account

What would generally not be considered good internal control of cash receipts?

Fraud

When a person intentionally deceives another person for personal gain

Management

Who has the responsibility to apply accounting standards when communicating with investors and creditors?