Ch 4 Cash and Internal Controls
Cash equivalents
Short term investments that have a maturity date no longer than 3 months from the date of purchase
NSF checks
Checks drawn on nonsufficient funds, or "bad" checks from customers
Internal controls
A company's plans to (1) safeguard the company's assets and (2) improve the accuracy and reliability of accounting information
Separation of duties
Authorizing transactions, recording transactions, and controlling related assets should be separated among employees
Outflows
Cash ________ related to operating activities exceed inflows; cash ________ related to expense activities exceed cash inflows related to revenue activities
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
Purchase cards
Company issued debit cards or credit cards that allow authorized employees to make purchases on behalf of the company
Cash
Currency, coins, balances in savings and checking accounts, items acceptable for deposit in these accounts (such as checks received from customers), credit card and debit card sales, and cash equivalents
Detective controls
Designed to detect errors or fraud that already have occurred
Preventive controls
Designed to keep errors or fraud from occurring in the first place
Investing activities
Include cash investments in long term assets and investment securities
Financing activities
Include transaction designed to raise cash or finance the business; 2 ways: borrow cash from lenders or raise cash from stockholders; this involves liabilities and stockholders' equity
Control activities
Includes a variety of policies and procedures used to protect a company's assets; 2 types are preventive and detective
Operating activities
Includes cash transactions involving revenue and expense events during the period; includes the cash effect of the same activities that are reported in the income statement to calculate net income
Sarbanes Oxley Act
Known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly referred to as SOX; the act established a variety of guidelines related to auditor-client relations and internal control procedures
Bank reconciliation
Matching the balance of cash in the bank account with the balance of cash in the company's own records
Fraud
Occurs when a person intentionally deceives another person for personal gain or to damage that person
Cash
Only transactions involving ____ affect a company's cash flow
COSO
The Committee of Sponsoring Organizations of the Treadway Commission provided a framework for designing an internal control system
Occupational fraud
The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources
Timing differences
This in cash occurs when the company records transactions either before or after the bank records the same transactions
Detective
This type of control includes: reconciliation, performance reviews, and audits
Preventive
This type of control includes: separation of duties, physical controls, proper authorization, employee management, and E-commerce controls
Occupational
This type of fraud has 2 sources: misuse of company resources and financial statement manipulation
Collusion
Two or more people acting in coordination to circumvent internal controls
Top executives
Who takes final responsibility of the establishment and success of a company?
Reconciling
___________ the bank account involves these steps: (1) _________ the bank's cash balance, (2) _________ the company's cash balance, and (3) update the company's cash account by recording the items identified in step 2