accounting 205: chapter 7- kevin breaux
sarbanes-oxley act of 2002 (SOX)
requires all publicly traded US corporations to maintain an adequate system of internal controls.
cash equivalents
short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that their market value is relatively insensitive to changes in interest rates
physical, mechanical, and electronic controls
what controls are essential to business?
internal control
consists of methods and measures adopted within a business
true
TRUE or FALSE: many companies struggle, not because they fail to generate sales, but because they cannot manage their cash
true
TRUE or FALSE: receiving clerks may not bother to count goods received
petty cash fund
a cash fund used to pay relatively small amounts
voucher system controls
a network of approvals by authorized individuals, acting independently, to ensure that all disbursements by check are proper.
it is listed first in the current assets section of the balance sheet
because cash is the most liquid asset, how is it listed?
cash
what asset is most susceptible to improper diversion and use?
increase
cash deposits ___________________ the bank's liability to the company (depositor)
decrease
cash payments ___________________ the bank's liability to the company (depositor)
restricted cash
cash that is not available for general use but rather is restricted for a special purpose (new equipment)
deposits in transit
deposits recorded by the depositor that have not been recorded by the bank
control activities
design policies and procedures to address specific risks
fraud
dishonest act by employee that results in personal benefit to the employee at a cost to the employer
to safeguard
effective internal control over cash is imperative to what?
to safeguard cash and ensure the accuracy of the accounting records for cash
effective internal control over cash is imperative to what?
internal auditor
employee of the company who evaluates on a continuous basis the effectiveness of company's system of internal control
control is most effective when only one person is responsible for a given task
explain establishment of responsibility
the work of one employee should, without a duplication of effort, provide a reliable basis for evaluating the work of another employee.
explain segregation of duties
by following the 5 basic principles of cash management
how can a company improve its chances of having adequate cash?
the reconciliation should be prepared by an employee who has no other responsibilities
how do you obtain the maximum benefit from bank reconciliation?
debit accounts receivable and credit cash
how do you record a NSF check?
collusion may occur
how does the human element limit internal controls?
SOX imposes more responsibilities on corporate executives and boards of directors to ensure that companies' internal controls are reliable and effective
how is SOX beneficial?
they are often combined and reported as cash
how is cash on hand, cash in banks, and petty cash reported?
each month
how often does a company receive a bank statement?
all documents should be prenumbered and all should be accounted for
how should documents be kept?
responsibility for related activities should be assigned to different individuals
how should responsibilities for related activities be designated?
responsibility for keeping the records for an asset should be separate from the of that asset.
how should the responsibility for keeping the records be assigned?
risk assessment
identify and analyze factors that create risk
they should be journalized by the depositor
in entries from bank reconciliation what should be done with each reconciling item used to determine the adjusted cash balance per books?
reconciliation procedure
in reconciling the bank account, it is customary to reconcile the balance per books and balance per bank to their adjusted (correct) cash balance
independent internal verification
involves the review, comparison, and reconciliation of data prepared by employees
outstanding checks
issued checks recorded by the company that have not been paid by the bank
reconciling the bank account
making the balance per books agree with the balance per book
control environment
management sets the "tone at the top"
electronic funds transfer (eft) system
new approach developed to transfer funds among parties without the use of paper (deposit tickets, checks, etc.). Uses wire, telegraph, or computer to transfer cash from one location to another.
first: compare the individual deposits on the bank statement with the deposits per company records. second: compare paid checks on the bank statement with the checks issued by the company. third: note any errors discovered in the previous steps and list them in the appropriate section of the reconciliation schedule (ex: check correctly written for 145 by company, but recorded in the company's books as 154) fourth: trace bank memoranda to the depositor's records (ex: bank service charge or interest earned)
the following steps should reveal all the reconciling items that cause the difference between the two balances:
monitoring
the system must be monitored to allow for reporting of significant deficiencies
information and communication
the system must capture and communicate all pertinent information both down and up the organization
physical controls
these controls relate primarily to the safeguarding of assets
mechanical and electronic controls
these controls safeguard assets and enhance the accuracy and reliability of accounting records
added to the balance per bank
what are deposits in transit added to?
reasonable assurance that assets are properly safeguarded and that the accounting records are reliable
what are internal controls generally designed to provide?
deducted from the balance per bank
what are outstanding checks deducted from?
opportunity, financial pressure, rationalization
what are the 3 main factors that contribute to fraudulent activity?
1. safeguard its assets from employee theft, robbery, and unauthorized use 2. enhance the accuracy and reliability of its accounting records by reducing the risk of errors and irregularities in the accounting process 3. increase the efficiency of operations 4. ensure compliance with laws and regulations
what are the 4 things that internal controls do for a business?
1. increase the speed of receivables collection 2. keep inventory levels low 3. monitor payment of liabilities 4. plan the timing of major expenditures 5. invest idle cash
what are the 5 basic principles of cash management?
a control environment, risk assessment, control activities, information and communication, and monitoring
what are the 5 primary components of internal control systems?
establishment of responsibility; segregation of duties; documentation procedures; physical, mechanical, and electronic control; independent internal verification; human resource control
what are the 6 principles of internal control?
checks paid and other debts (such as NSF checks) that reduce the balance in the depositor's account deposits and other credits that increase the balance in the depositor's account the account balance after each day's transactions
what do bank statements each month show?
cash sales; collections on account from customers; the receipt of interest, rent, and dividends; investments by owners; and bank loans
what do cash receipts result from?
evidence that transactions and events have occured
what do documents provide?
bonds employees who handle cash, rotates employee's duties and requiring them to take vacations, conducts thorough background checks on new hires
what do human resource controls do?
independent internal verification
what do large companies usually use internal auditors for?
independent outside auditors must attest to the level of internal controls
what does SOX do for independent outside auditors?
companies must develop sound principles of control over financial reporting and continually assess that the controls are working
what does SOX make companies develop?
good internal control over cash
what does a bank contribute significantly to?
the control of cash because a double record is maintained of all bank transactions
what does a bank facilitate? why?
the amount of cash that must be kept on hand
what does a bank minimize?
the company obtains insurance protection against misappropriation of assets by dishonest employees
what does bonding employees who handle cash mean?
coins, currency, checks, money orders, and money on hand
what does cash consist of?
the premise that the costs of establishing control procedures should not exceed their expected benefit
what does the concept of reasonable assurance rest on?
human element
what is an important factor in every system of internal control?
too much personal debt or a desire for a better lifestyle
what is financial pressure usually related to?
lack of sufficient controls
what is opportunity for fraudulent activity usually due to?
for why the employee deserves the compensation from fraudulent acts
what is rationalization justification for?
the asset cash maintained by a company. it should be possible at anytime.
what is the "flip-side" of the bank's liability for a company? when is it possible to make the two accounts agree
time lags that prevent one of the parties from recording the transaction in the same period and errors by either party in recording the transactions
what is the lack of agreement between the two balances due to?
cash
what is the most liquid asset?
cash over and short
what is used to record the difference when the amount deposited at the bank will not agree with the cash recorded in the accounting records based on the cash register tape
bank's perspective
what perspective are bank statements prepared?
they should be reported to a management level that can take appropriate corrective action
what should be done with discrepancies and exceptions?
documents that are source documents for accounting entries should be promptly forwarded to the accounting department to help ensure timely recording of the transaction and event
what should be done with source documents?
when payments are made by check, rather than by cash, except for incidental amounts that are paid out of petty cash
when are internal control over cash disbursements more effective? what is the exception?
collusion
when employees come together to complete a task
periodically or on a surprise basis
when should verification be made?
verification should be done by an employee who is independent of the personnel responsible for the information
who should do verification?
the company treasurer
who's responsibility is it to manage cash?
to pay expenses and liabilities or to purchase assets
why is cash disbursed?