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