Acct Chapter 5
Bank reconciliations are needed to reconcile for ______
deposits in transit outstanding checks
control activites
establish responsibility, segregate duties, restrict access, document procedures, independently verify
to reduce risk ________ are vital
internal controls
A bank reconciliation is a(n) ______.
internal report prepared to compare the company's cash records with the bank statement
Fraud Triangle
opportunity, incentive (financial pressure), rationalization
Which of the following duties should not be the responsibility of an employee who has access to cash?
perform bank reconciliations record cash collected in the journal
The benefits of internal control procedures are that they ______.
protect against theft of assets enhance the reliability of accounting information improve the efficiency and effectiveness of operations
Short-term, highly liquid investments must be:
readily convertible into known amount of cash AND original maturity of 3 months or less
Unused checks are stored in the vault.
restrict access
______cash must be reported separately on the balance sheet because it is legally or contractually required to be set aside for a specific purpose.
restricted
The treasurer is not allowed to make bank deposits.
segregate duties
Restricted cash is reported _____
separately as an asset on the balance sheet
tools of effective cash management include:
- cash controls over receipts and disbursements - preparation of bank reconciliations
Control of Cash Disbursements
1. All major disbursements made by check 2. Pay only small, misc. expenditures from Petty Cash 3. Prepare Bank Reconciliation
Control of Cash Receipts:
1. Record when received 2. Deposit receipts intact 3. Separation of duties 4. lock box for checks
internal controls for cash are important for 2 reasons:
1. the volume for cash transactions is enormous 2. Cash is valuable, portable, and "owned" by the person who possesses it, so it poses a high risk theft.
balance per books
Add: Notes collected by bank interest collected book errors Less: NSF checks Service Charges overdraft charges book errors
A goal of the Sarbanes-Oxley Act is improving corporations' internal controls. Which of these may accomplish this goal?
An audit committee of independent directors oversees financial matters of the company. Marketing managers must determine whether the marketing team is submitting accurate sales and expense reports. External auditors must test the effectiveness of the company's internal controls.
Cash
Cash on hand + cash in banks + undeposited checks (deposit in transit), appears on balance sheet and statement of cash flows
The company's checks are prenumbered.
Document Procedures
the treasurer signs checks
Establish responsibility
A bank reconciliation is prepared each month.
Independently verify
cash equivalents
Short-term, highly liquid investments
balance per bank
add deposits in transit and bank errors/ less outstanding checks and bank errors
credit memo
bank increases your cash account
debit memo
bank reduces your cash account
examples of cash equivalents
certificates of deposit cco, money market funds, treasury bills, commercial paper
3 main categories of fraud
corruption, asset misappropriation, financial statement fraud
internal controls can never completely prevent and detect errors and fraud for two reasons:
cost/benefit limitations, human error or fraud
SOX (Sarbanes-Oxley Act)
counteract incentives, reduce opportunities, encourage honesty