Ch 6 Cash, Fraud, and Internal Control
_____ terms and _____ terms are shown on the purchase order.
Shipping; credit
human fraud
intentionally defeating internal controls, such as management override, for personal gain
opportunity
internal control weaknesses in a business
voucher register
journal (referred to as book of original entry) in which all vouchers are recorded after they have been approved
voucher system
procedures and approvals designed to control cash disbursements and acceptance of obligations
After the petty cash fund is established, the Petty Cash account is not debited or credited again unless...
the amount of fund is changed.
cost-benefit principle
the costs of internal controls must not exceed their benefits
Auditors, when auditing inventory, check a sampling of purchases by reviewing...
the purchase order, receiving report, and invoice
internal controls or internal control system
all policies and procedures used to protect assets,ensure reliable accounting, promote efficient operations and urge adherence to company policies
a petty cash shortage is recorded as
an expense in the reimbursing entry with a debit to the Cash Over and Short account
invoice
an itemized record of goods prepared by the vendor that lists the customer's name, items sold, sales prices, and terms of sale
check register
another name for a cash payments journal when the journal has a column for check numbers
How many copies are made of purchase order?
at least five
liquidity
availability of resources to meet short-term cash requirements
Debit memos (DM) from the bank produce
credits on the depositor's books
When you make a deposit, the bank
credits your account; credits increase the banks liability to you
adjusting entry to reinstate account due from an NSF check
debit accounts receivable; credit cash
journal entry to charge account for NSF check
debit accounts receivable; credit cash
If a cash register's record shows $550 but the count of the cash in the register is $555, the entry to record cash sales and its overage is
debit cash 555; credit cash over and short 5; credit sales 550
If a cash register's record shows $625 but the count of cash in the register is $621, the entry to record cash sales and its shortage is
debit cash 621; debit cash over and short 4; credit sales 625
adjusting entry to record collection of revenue
debit cash; credit interest revenue
journal entry to record interest earned in checking account
debit cash; credit interest revenue
adjusting entry to record collection of note
debit cash; credit notes receivable
journal entry to record note collected by bank
debit cash; credit notes receivable
journal entry to decrease petty cash fund
debit cash; credit petty cash
How would the journal entry look to reimburse petty cash $75 fund balance- $3.70 cash remaining?
debit miscellaneous expenses, merchandise inventory, delivery expense, and office supplies expense; credit cash 71.30
adjusting entry to record bank service charges
debit miscellaneous expenses; credit cash
journal entry for check printing charge
debit miscellaneous expenses; credit cash
The entry to record the setup of a petty cash fund is
debit petty cash; credit cash
journal entry to increase petty cash fund
debit petty cash; credit cash
Credit memos (CM) from the bank produce
debits on the depositor's books
When you write a check or use your debit card, the bank
decreases its liability to you; they debit your account
deposits in transit
deposits recorded by the company but not yet recorded by its bank
Firms often have multiple bank accounts for
different needs and for specific transactions such as payroll
invoice approval
document containing a checklist of steps necessary for approving the recording and payment of an invoice; aka check authorization
purchase requisition
document listing merchandise needed by a department and requesting it be purchased
check
document signed by a depositor instructing the bank to pay a specified amount to a designated recipient
purchase order
document used by the purchasing department to place an order with a seller (vendor)
rationalization
employees justifying fraudulent behavior
pressure
financial, family, and societal stresses to succeed
The most liquid assets are usually reported ______ on a balance sheet; the least liquid assets are reported ______.
first; last
forms of check fraud
forged signatures, forged endorsements, counterfeit checks, altered checks, check kiting
receiving report
form used to report that ordered goods were received and to describe their quantity and condition
cash
includes currency, coins, and amounts on deposit in bank checking or savings accounts
signature card
includes signature of each person authorized to sign checks on the bank account
cash over and short
income statement account used to record cash overages and shortages arising from errors in cash receipts or payments
Companies invest idle cash in cash equivalents to _______ _____
increase income
electronic funds transfer (EFT)
use of electronic communication to transfer cash from one party to another
bank account
used to deposit money for safekeeping and helps control withdrawals
Companies use surprise petty cash counts for ________.
verification
how is days' sales uncollected computed?
accounts receivable/net sales x 365
bank balance adjustments
add deposits in transit; subtract outstanding checks; add or subtract corrections of bank errors
book balance adjustments
add interest earned and unrecorded cash receipts; subtract bank fees and NSF checks; add or subtract corrections of book errors
Requirements of Sarbanes-Oxley Act
(1) company must have effective internal controls (2) auditors must evaluate internal controls (3) violators receive harsh penalties (4) auditors' work is overseen by PCAOB
The five ingredients of internal control that add to the quality of accounting information
(1) control environment (2) risk assessment (3) control activities (4) information and communication (5) monitoring
Effective cash management involves applying the following cash management strategies:
(1) encourage collection of receivables (2) delay payment of liabilities (3) keep only necessary assets (4) plan expenditures (5) invest excess cash
Internal controls protect cash and meet three guidelines:
(1) handling cash is separate from recordkeeping of cash (2) cash receipts are promptly deposited in a bank (3) cash payments are made by check or electronic funds transfer (EFT)
Internal controls have limitations from
(1) human error or fraud (2) the cost-benefit principle
triple threat of fraud
(1) opportunity (2) pressure (3) rationalization
separation of duties
Dividing responsibilities between two or more people to limit fraud and promote accuracy of accounting records.
What factors does the days' sales uncollected number reflect?
a company's ability to collect receivables, customer financial health, customer payment strategies, and discount terms
a petty cash overage is recorded with
a credit to Cash Over and Short in the reimbursing entry
Committee of Sponsoring Organizations (COSO)
a joint initiative of five private sector organizations and is dedicated to providing thought leadership
a check involves three parties:
a maker who signs the check, a payee who is the recipient, and a bank (or payer) on which the check is drawn
Books refer to
accounting records
bank statement
bank report on the depositor's beginning and ending cash balances and a listing of its changes, for a period
Only items impacting the _____ _______ need entries.
book balance
vendee
buyer of goods or services
canceled checks
checks that the bank has paid and deducted from the depositor's account
outstanding checks
checks written and recorded by the depositor but not yet paid by the bank at the bank statement date
Internal control failure reduces...
confidence in financial statements
adjusting entry to correct recording error on a check
debit (rent) expense; credit cash
Your checking account is a ________ from the bank's perspective but _______ from yours.
liability; asset
deposit ticket
lists items such as currency, coins, and checks deposited and their corresponding dollar amounts
days' sales uncollected
measure of the liquidity of receivables; used to estimate how much time is likely to pass before the current amount of accounts receivable is received in cash
credit memorandum
notification that the issuer (sender) has credited the recipient's account in the sender's records
debit memorandum
notification that the issuer (sender) has debited the recipient's account in the sender's records
human error
occurs from carelessness, misjudgement, or confusion
bank reconciliation
report that explains the difference between the book (company) balance of cash and the cash balance reported on the bank statement, for purposes of computing the adjusted cash balance
Sarbanes-Oxley Act
requires managers and auditors of companies whose stock is traded on an exchange (called public companies) to document and verify internal controls
liquid assets
resources such as cash that are easily converted into other assets or used to pay for goods, services, or liabilities
vendor
seller of goods or services
cash equivalents
short-term investment assets that are readily convertible to a known cash amount or sufficiently close to their maturity date so that market value is not sensitive to interest rate changes
petty cash
small amount of cash in a fund to pay minor expenses; accounted for using an imprest system