Chapter 8 MM

Basic Bank Services - 2

Usually once a month, the bank sends each depositor a bank statement showing the activity in the account. A bank statement, which reflects the information in the bank's records, includes the beginning-of-period balance of the depositor's account, checks and other debits decreasing the account during the period, deposits and other credits increasing the account during the period, and the end-of-period balance of the depositor's account. Different banks use different formats for their bank statements. A bank statement typically includes: a summary of changes in the account; paid checks along with other debits are listed; as well as deposits and credits to the account. While the cash in the bank account is an asset on the depositor's books, the account is a liability on the bank's records because the bank owes that money to the depositor. As such, when the depositor increases the account balance, the bank records it with a credit to that liability account. When the depositor decreases the account balance, the bank records it with a debit to that liability account. Canceled checks are checks the bank has paid and deducted from the customer's account during the period. In the past, bank statements included the depositor's canceled checks. Now, most banks provide online access to showing canceled checks electronically via online access to accounts. Examples of other deductions on a bank statement include service charges and fees, checks deposited that are uncollectible, and withdrawals through automated teller machines (ATMs). (Most company checking accounts do not allow ATM withdrawals because of the company's desire to make all disbursements by check.) The bank typically notifies the depositor of each deduction to the depositor's account with a debit memorandum. A debit memorandum indicates that the bank has debited, or reduced, the depositor's account balance. (Recall that the depositor's account is a liability on the bank's books and debits are used to decrease liability accounts.) Examples of other transactions that increase the depositor's account include amounts the bank collects on behalf of the depositor and interest paid on the depositor's account. The bank typically notifies the depositor of each increase with a credit memoranda. (Again, recall that the depositor's account is a liability on the bank's books and credits are used to increase liability accounts.)

b. debit to Accounts Receivable in the amount of $75

When the company's bank reconciliation was prepared, one of the adjustments to the balance per books included an NSF check in the amount of $75 (that was received from a customer in payment of her account). The journal entry to record this item includes a _____. a. debit to Cash in the amount of $75 b. debit to Accounts Receivable in the amount of $75 c. debit to NSF Expense in the amount of $75 d. credit to Accounts Payable in the amount of $75

The impact of technology on internal control might be summarized as follows:

-*Reduced Processing Errors*—Technologically advanced systems reduce the number of errors in processing information. Provided the software and data entry are correct, the risk of mechanical and mathematical errors is nearly eliminated. However, we must beware that erroneous software or data entry does exist. -*More Extensive Testing of Records*—A company's review and audit of electronic records can include more extensive testing when information is easily and rapidly accessed. Limited Evidence of Processing—Many data processing steps are increasingly done by computer. As a result, fewer hard-copy items of documentary evidence are available for review and, yet, technologically advanced systems can provide new evidence. -*Crucial Separation of Duties*—Technological advances in accounting information systems often result in job eliminations. Although those who remain have the special skills necessary to operate advanced programs and equipment, a company with a reduced workforce risks losing its crucial separation of duties. The company must control and monitor employees to minimize risk of error and fraud. Increased -*E-Commerce*—Technology has encouraged the growth of e-commerce. All e-commerce transactions involve various risks, including the risk of identity theft. Nearly 5 percent of Americans already report being victims of identity theft, and roughly 10 million say their privacy has been compromised.

Triple Threat of Fraud

-Opportunity -Pressure -Rationalization

Usually, the ending cash balance on the bank statement does not agree with the ending cash balance in the company's Cash account because of timing differences and errors. The most common causes of differences are:

-Outstanding checks -Deposits in transit -Deductions for uncollectible items and for services -Additions for collections and for interest -Errors

Internal control policies and procedures vary from company to company according to such factors as the nature of the business and its size. Certain fundamental internal control principles apply to all companies. The principles of internal control are to:

1) Establish responsibilities. 2) Maintain adequate records. 3) Insure assets and bond key employees. 4) Separate recordkeeping from custody of assets. 5) Divide responsibility for related transactions. 6) Apply technological controls. 7) Perform regular and independent reviews. Let's learn more about each of these principles.

Basic Bank Services - 1

A bank account is a record set up by a bank for a customer. It permits a customer to deposit money for safekeeping and helps control withdrawals. To limit access to a bank account, all persons authorized to write checks on the account must sign a signature card, which bank employees use to verify signatures on checks. Each bank deposit is supported by a deposit ticket, which lists items such as currency, coins, and checks deposited along with their corresponding dollar amounts. The bank gives the customer a copy of the deposit ticket or a deposit receipt as proof of the deposit. To withdraw money from an account, the depositor can use a check, which is a document signed by the depositor instructing the bank to pay a specified amount of money to a designated recipient. 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. Sometimes, a check is accompanied with an optional remittance advice that explains the payment. When a remittance advice is unavailable, the memo line is often used for a brief explanation. Electronic funds transfer (EFT) is the electronic transfer of cash from one party to another. No paper documents are necessary. Banks simply transfer cash from one account to another with a journal entry. Companies are increasingly using EFT because of convenience and low cost. We now commonly see items such as payroll, rent, utilities, insurance, and interest payments handled by EFT. A bank statement is sometimes a depositor's only notice of an EFT.

b. a deposit to the depositor's account

A bank does not issue a debit memorandum to notify a depositor of _____. a. a deduction to a depositor's account b. a deposit to the depositor's account c. a withdrawal through an ATM d. a check that was deposited in the account but was returned NSF e. periodic payments arranged in advance, by a depositor

Bank Reconciliation - 1

A bank reconciliation is performed to verify the accuracy of both the bank statement and the cash accounts of a business. A bank reconciliation should be prepared each time a bank statement is received from the bank. This process also identifies any transactions or changes that need to be reflected on the company's books -A bank reconciliation has two parts. One part starts with the bank balance, makes adjustments for timing differences and errors, and arrives at an adjusted bank balance. Think of the adjustments to the cash balance per bank statement as items that the bank doesn't know about yet. Except for bank errors (which must be individually analyzed), each of these items should be added or deducted based on what the bank will do when it processes the item. No entries are required for the items reflected as adjustments to the cash balance per bank statement. -The second part of the bank reconciliation starts with the book balance, makes adjustments for timing differences and errors, and arrives at an adjusted book balance. -Think of the adjustments to the cash balance per books as the items that the company didn't know about until the bank statement was received. Except for book errors (which must be individually analyzed), each of these items should be added or deducted based on what the bank did when it processed the item. A journal entry is required for each item reflected as an adjustment to the cash balance per books. Let's go through the process together.

Petty Cash System of Control

A basic principle for controlling cash disbursements is that all payments must be made by check. An exception to this rule is made for petty cash disbursements, which are the small payments required for items such as postage, courier fees, minor repairs, and low-cost supplies. To avoid the time and cost of writing checks for small amounts, a company sets up a petty cash fund to make small payments. Establishing a petty cash fund requires estimating the total amount of small payments likely to be made during a short period such as a week or month

4) Separate Recordkeeping from Custody of Assets

A person who controls or has access to an asset must not keep that asset's accounting records. This principle reduces the risk of theft or waste of an asset because the person with control over it knows that another person keeps its records. Also, a recordkeeper who does not have access to the asset has no reason to falsify records. This means that to steal an asset and hide the theft from the records, two or more people must collude—or agree in secret to commit the fraud.

Limitations of Internal Control - 1

All internal control policies and procedures have limitations that usually arise from either (1) the human element or (2) the cost-benefit principle. Internal control policies and procedures are applied by people. This human element creates several potential limitations that can be categorized in two ways. The first is human error. Human error can occur from negligence, fatigue, misjudgment, or confusion. The second category is human fraud. Human fraud involves intent by people to defeat internal controls, such as management override, for personal gain. Fraud also includes collusion to thwart the separation of duties. Collusion occurs when two or more individuals work together to circumvent the company's internal controls in order to commit fraud.

d. helps protect company assets

An effective system of internal control _____. a. allows employees to easily commit fraud b. does not promote efficient operations c. typically costs more than the benefits that will be realized d. helps protect company assets

Days' Sales Uncollected

An important part of cash management is monitoring the receipt of cash from receivables. If customers and others who owe money to a company are delayed in making payments, then that company that is owed the money can find it difficult to pay its obligations when they are due. A company's customers are crucial partners in its cash management. Many companies attract customers by selling to them on credit. This means that cash receipts from customers are delayed until accounts receivable are collected. One measure of how quickly a company can convert its accounts receivable into cash is the days' sales uncollected. This measure is computed by dividing the current balance of receivables by net credit sales over the year just completed and then multiplying by 365, the number of days in a year. Because net credit sales usually are not reported to external users, the net sales (or revenues) figure is commonly used in the computation of this ratio. Managers use days' sales uncollected to estimate how much time is likely to pass before the current amount of accounts receivable is received in cash.

e. all of the above

An internal control system consists of the policies and procedures managers use to _____. a. ensure reliable accounting b. protect assets c. promote efficient operations d. urge adherence to company policies e. all of the above

Additions for collections and for interest

Banks sometimes act as collection agents for their depositors by collecting notes and other items. When a bank collects an item, it is added to the depositor's account, less any service fee. The bank also sends a credit memorandum to notify the depositor of the transaction. The bank statement might also include a credit for any interest earned.

Dr. Petty Cash for 150 Cr. Cash for 150

Because its petty cash fund was depleted so quickly, on February 16, Derrick Company decided to increase the petty cash fund from $200 to $350. Complete the seller's necessary journal entry.

Errors

Both banks and depositors can make errors. Bank errors might not be discovered until the depositor prepares the bank reconciliation. Also, depositor errors are sometimes discovered when the bank balance is reconciled. Errors are identified by comparing deposits on the bank statement with deposits in the accounting records and comparing canceled checks on the bank statement with checks recorded in the accounting records.

6) Apply Technological Controls

Cash registers, check protectors, time clocks, and personal identification scanners are examples of devices that can improve internal control. Technology often improves the effectiveness of controls. A cash register with a locked-in tape or electronic file makes a record of each cash sale. A check protector perforates the amount of a check into its face and makes it difficult to alter the amount. A time clock registers the exact time an employee both arrives at and departs from the job. Mechanical change and currency counters quickly and accurately count amounts, and personal scanners limit access to only authorized individuals. Each of these and other technological controls are an effective part of many internal control systems.

7) Perform Regular and Independent Reviews

Changes in personnel, stress of time pressures, and technological advances present opportunities for shortcuts and lapses. To counter these factors, regular reviews of internal control systems are needed to ensure that procedures are followed. These reviews are preferably done by internal auditors not directly involved in the activities. Their impartial perspective encourages an evaluation of the efficiency as well as the effectiveness of the internal control system. Many companies also pay for audits by independent, external auditors. These external auditors test the company's financial records to give an opinion as to whether its financial statements are presented fairly. Before external auditors decide on how much testing is needed, they evaluate the effectiveness of the internal control system. This evaluation is often helpful to a client.

Outstanding Checks

Checks written by the company and recorded in the company's books that have not yet been paid (or cleared) by the bank are referred to as outstanding checks. They are identified by comparing the list of canceled checks on the bank statement with the record of checks maintained by the company.

Deposits in transit

Deposits sent to the bank by the company and recorded in the company's books that have not yet been recorded by the bank are referred to as deposits in transit. They are determined by comparing the deposits listed on the bank statement with the company deposit records.

Days' sales uncollected = (Accounts Receivable / Net sales) x 365

Equation for Days' sales uncollected

5) Divide Responsibility for Related Transactions

Good internal control divides responsibility for a transaction or a series of related transactions between two or more individuals or departments. This is to ensure that the work of one individual acts as a check on the other. This principle, often called separation of duties, is not a call for duplication of work. Each employee or department should perform unduplicated effort. Assigning responsibility for two or more of these tasks to one party (rather than two or more parties) might increase mistakes and perhaps fraud.

3) Insure Assets and Bond Key Employees

Good internal control means that assets are adequately insured against casualty and that employees handling large amounts of cash and easily transferable assets are bonded. An employee is bonded when a company purchases an insurance policy, or a bond, against losses from theft by that employee. Bonding reduces the risk of loss. It also discourages theft because bonded employees know an independent bonding company will be involved when theft is uncovered and is unlikely to be sympathetic with an employee involved in theft.

2) Maintain Adequate Records

Good recordkeeping is part of an internal control system. It helps protect assets and ensures that employees use prescribed procedures. Reliable records are also a source of information that managers use to monitor company activities. When detailed records of equipment are kept, for instance, items are unlikely to be lost or stolen without detection. Similarly, transactions are less likely to be entered in wrong accounts if a chart of accounts is set up and carefully used. Many preprinted forms and internal documents are also designed for use in a good internal control system. When sales slips are properly designed, for instance, sales personnel can record needed information efficiently with less chance of errors or delays to customers. When sales slips are pre-numbered and controlled, each one issued is the responsibility of one salesperson, preventing the salesperson from pocketing cash by making a sale and destroying the sales slip. Computerized point-of-sale systems achieve the same control results.

Limitations of Internal Control

Human element: -Error -Fraud Cost-benefit principle

Conceptual Objective C1: Define internal control and identify its purpose and principles

In this module, you defined internal control and identified its purpose and principles. An internal control system consists of the policies and procedures managers use to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies. It can prevent avoidable losses and help managers both plan operations and monitor company and human performance. Principles of good internal control include establishing responsibilities, maintaining adequate records, insuring assets and bonding employees, separating recordkeeping from custody of assets, dividing responsibilities for related transactions, applying technological controls, and performing regular independent reviews

Procedural Objective P2: Explain and record petty cash fund transactions

In this module, you explained and recorded petty cash fund transactions. Petty cash disbursements are payments of small amounts for items such as postage, courier fees, minor repairs, and supplies. A company usually sets up one or more petty cash funds. A petty cash fund cashier is responsible for safekeeping the cash, making payments from this fund, and keeping receipts and records. A Petty Cash account is debited only when the fund is established or increased in amount. When the fund is replenished, petty cash disbursements are recorded with debits to expense (or asset) accounts and a credit to cash.

Procedural Objective P3: Prepare a bank reconciliation

In this module, you prepared a bank reconciliation. A bank reconciliation proves the accuracy of the depositor's and the bank's records. The bank statement balance is adjusted for items such as outstanding checks and unrecorded deposits made on or before the bank statement date but not reflected on the statement. The book balance is adjusted for items such as service charges, bank collections for the depositor, and interest earned on the account.

Days' Sales Uncollected - 1

Let's look at an example. -After graduating with a degree in culinary arts, you have been operating a successful catering company for a number of years. Most of your clients have been not-for-profit organizations that hire you to cater large fund-raising dinners and you have standardized much of your catering operations. To grow your business, you recently began catering for corporate events including holiday and retirement parties. Previously, most of your not-for-profit clients paid you the evening of the event. Your corporate clients prefer that you bill them and allow 30 days for payment. -Your sales totaled $120,000 during 2015. On January 1, 2015, your balance sheet reported accounts receivable of $17,500. Your accounts receivable grew to $22,500 on December 31, 2015. -Your days' sales uncollected is calculated as follows. Ending accounts receivable of $22,500 divided by net sales of $120,000 times 365 equals 68.4 days. This means that it will take about 68 days to collect cash from ending accounts receivable. Given that your company's credit terms are net 30 days, you would expect your days' sales uncollected to be closer to 30 days. Your customers are not paying on a timely basis. This number reflects one or more of the following factors: *your ability to collect receivables, the financial health of your customers, and the payment strategies used by your customers.*

Purpose of Internal Control - 1

Managers or owners of small businesses often control the entire operation. These managers usually purchase all assets, hire and manage employees, negotiate all contracts, and sign all checks. They know from personal contact and observation whether the business is actually receiving the assets and services paid for. However, a company does not have to be very large before the owner is not able to maintain this closer personal supervision. Instead, they must delegate responsibilities and rely on formal procedures to control business activities.

Managers use an internal control system to monitor and control business activities. An internal control system consists of the policies and procedures managers use to: -Protect assets -Ensure reliable accounting -Promote efficient operations -Urge adherence to company policies

Managers place a high priority on internal control systems because they can prevent avoidable losses, help managers plan operations, and monitor company and employee performance.

Dr. Petty Cash for 200 Cr. Cash for 200

On February 1, Derrick Company establishes a $200 petty cash fund. Complete the seller's necessary journal entry.

1) Establish Responsibilities

Proper internal control means that responsibility for a task is clearly established and assigned to one person. When a problem occurs in a company where responsibility is not identified, determining who is at fault is difficult. For instance, if two sales clerks share the same cash register and there is a cash shortage, neither clerk can be held accountable. To prevent this problem, one clerk might be given responsibility for handling all cash sales. Alternately, a company can use a register with separate cash drawers for each clerk. Do you remember waiting at a retail counter during a shift change while employees swap cash drawers? Now you know why!

Dr. Postage Expense for 140 Dr. Printing Expense for 54 Cr. Cash Over and Short for 1 Cr. Cash for 193

Recall on February 1, Derrick Company established a $200 petty cash fund. On February 15, when the fund balance reached $7, the petty cash custodian prepared a petty cash report that summarized receipts for postage ($140) and printing ($54). Complete the seller's necessary journal entry.

Dr. Cash for 150 Cr. Interest Revenue for 150

The company's bank reconciliation at June 30 included the following item. The bank statement included a credit memorandum in the amount of $150 for interest. Complete the necessary journal entry.

Bank Reconciliation - 2

Recall that a bank reconciliation has two parts. The "bank" part starts with the bank balance, makes adjustments for timing differences and errors, and arrives at an adjusted bank balance. Recall that the adjustments here are items that the bank doesn't know about yet. Also, recall that, except for bank errors (which must be individually analyzed), each of these items should be added or deducted based on what the bank will do when it processes the item. -Step 1—Identify the bank statement balance of the cash account (balance per bank). VideoBuster's bank balance is $2,050. -Step 2—Identify and list any unrecorded deposits and any bank errors understating the bank balance. Add them to the bank balance. VideoBuster's $145 deposit placed in the bank's night depository on October 31 is not recorded on its bank statement. -Step 3—Identify and list any outstanding checks and any bank errors overstating the bank balance. Deduct them from the bank balance. VideoBuster's comparison of canceled checks with its books shows two checks outstanding: No. 124 for $150 and No. 126 for $200. -Step 4—Compute the adjusted bank balance. The adjusted bank balance is $1,845. No journal entries are required for the items reflected as adjustments to the cash balance per bank statement. These items are already recorded on the company's books. The "book" part of the bank reconciliation starts with the book balance, makes adjustments for timing differences and errors, and arrives at an adjusted book balance. Again, think of the adjustments to the cash balance per books as the items that the company didn't know about until the bank statement was received. Except for book errors (which must be individually analyzed), each of these items should be added or deducted based on what the bank did when it processed the item. -Step 5—Identify the company's book balance of the cash account (balance per book). VideoBuster's book balance is $1,404.58. -Step 6—Identify and list any unrecorded credit memoranda from the bank, any interest earned, and errors understating the book balance. Add them to the book balance. VideoBuster's bank statement includes a credit memorandum showing the bank collected a note receivable for the company on October 23. The note's proceeds of $500 (minus a $15 collection fee) are credited to the company's account. VideoBuster's bank statement also shows a credit of $8.42 for interest earned on the average cash balance. There was no prior notification of this item, and it is not yet recorded. -Step 7—Identify and list any unrecorded debit memoranda from the bank, any service charges, and errors overstating the book balance. Deduct them from the book balance. Debits on VideoBuster's bank statement that are not yet recorded include (a) a $23 charge for check printing and (b) an NSF check for $20 plus a related $10 processing fee. (The NSF check is dated October 16 and was included in the book balance.) -Step 8—Compute the adjusted book balance. The adjusted book balance is $1,845. -Step 9—Verify that the two adjusted balances from steps 4 and 8 are equal.

d. divides responsibility for a transaction between two or more individuals

Segregation of duties _____. a. avoids duplication of work b. creates situations in which mistakes are more likely to occur c. increases the possibility of fraud d. divides responsibility for a transaction between two or more individuals

The Sarbanes-Oxley Act (SOX) requires the managers and auditors of companies whose stock is traded on an exchange (called public companies) to document and certify the system of internal controls.

Some of the specific requirements of SOX include: -Auditors must evaluate internal controls and issue an internal control report. -Auditors of a client are restricted as to what consulting services they can provide that client. -The person leading an audit can serve no more than seven years without a two-year break. -Auditors' work is overseen by the Public Company Accounting Oversight Board (PCAOB). -Harsh penalties exist for violators—sentences up to 25 years in prison with severe fines.

Yes

The company's bank reconciliation on June 30 included a credit memorandum in the amount of $150 for interest. Does the company need to prepare a journal entry relating to this item to adjust the book balance to the correct balance?

Dr. Accounts Payable for 810 Cr. Cash for 810

The company's bank reconciliation on June 30 included check #1221 (in payment of an account payable) written for $4,900, but recorded in the accounting records as $4,090. Complete the seller's necessary journal entry.

Deductions for uncollectible items and for services

Sometimes, a company has deposited a check from a customer that could not be collected. That is, the bank processed the check through banking channels to the customer's bank, but the customer's account did not have sufficient funds to cover the check. As a result, after marking it NSF (for non-sufficient funds), the customer's bank returned the check to the company's bank, which then charged it back to the company's account. The bank would have initially credited the depositor's account for the amount of the check. When the bank learns the check is uncollectible, it debits (reduces) the depositor's account for the amount of that check. The bank might also charge the depositor a fee for processing an uncollectible check. Other possible bank charges to a depositor's account include printing new checks and service fees.

Steps in Preparing Bank Reconciliation

Step 1. Identify the bank statement balance (balance per bank). Step 2. Identify and add unrecorded deposits and bank errors understating the bank balance. Add them to the bank balance. Step 3. Identify and deduct outstanding checks and bank errors overstating the bank balance from the bank balance. Step 4. Compute the adjusted bank balance. Step 5. Identify the company's book balance (balance per book). Step 6. Identify and add unrecorded credit memoranda, interest earned, and errors understating the book balance to the book balance. Step 7. Identify and deduct unrecorded debit memoranda, service charges, and errors overstating the book balance and deduct them from the book balance. Step 8. Compute the adjusted book balance. Step 9. Verify that the two adjusted balances are equal. -If the two adjusted balances from steps 4 and 8 are equal, then they are reconciled. If not, go back and check for accuracy and any missing data.

d. requires managers of public companies to document and assess the effectiveness of all internal control processes that impact financial reporting

The Sarbanes-Oxley Act _____. a. creates less confidence in accounting systems and the reports issued by public companies b. provides sentences of up to 7 years in prison with severe fines for violators of the act c. requires managers of public companies to hire the company's auditors for all consulting work d. requires managers of public companies to document and assess the effectiveness of all internal control processes that impact financial reporting

Yes

The company's bank reconciliation on June 30 included check #1221 (in payment of an account payable) written for $4,900, but recorded in the accounting records as $4,090. Does the company need to prepare a journal entry relating to this item to adjust the book balance to the correct balance?

No

The company's bank reconciliation on June 30 included deposits in transit that totaled $3,000 on June 30. Does the company need to prepare a journal entry relating to this item to adjust the book balance to the correct balance?

No

The company's bank reconciliation on June 30 included outstanding checks that totaled $4,000 at June 30. Does the company need to prepare a journal entry relating to this item to adjust the book balance to the correct balance?

*Bank statement balance* -$26,960 Add: Deposit in transit 3,000 Deduct: Outstanding checks 4,000 Adjusted bank balance: $25,960 *Book balance* -$26,620 Add: Interest earned 150 Deduct: Error on check #1221 810 Adjusted bank balance: $25,960

The following information is available for the Maribel Company for the month of June: 1) The unadjusted balance of the company's Cash account was $26,620 at the end of June. 2) The bank statement shows a balance on June 30 of $26,960. 3) Outstanding checks totaled $4,000 at June 30. 4) Deposit in transit totaled $3,000 on June 30. 5) The bank statement included a credit memorandum in the amount of $150 for interest. 6) Check #1221 (in payment of account payable) was written for $4,900, but the recorded in the accounting records as $4,090.

Technology and Internal Control

The fundamental principles of internal control are relevant no matter what the technological state of the accounting system, from purely manual to fully automated systems. Technology impacts an internal control system in several important ways. Perhaps the most obvious is that technology enables us quicker access to databases and information. Used effectively, technology greatly improves managers' abilities to monitor and control business activities.

Triple Threat of Fraud - 1

The human element highlights the importance of establishing an internal control environment to convey management's commitment to internal control policies and procedures. Human fraud is driven by the triple threat of fraud: -*Opportunity*—Refers to internal control deficiencies in the workplace. -*Pressure*—Refers to financial, family, society, and other stresses to succeed. -*Rationalization*—Refers to employees justifying their fraudulent behavior. Whenever two or more of these threats exist, the threat of fraud increases greatly!.

d. establish responsibilities

The principles of internal control include _____. a. use only computerized systems b. bond all employees c. require automated sales systems d. establish responsibilities

b. 53.7 days

The records of Mary's Shoes included the following information: A/R, Jan 1, 2016: $75,000 A/R, Dec 31, 2016: 125,000 Net Sales: 850,000 COGS: 400,000 The company's days' dales uncollected is closest to __________. a. 32.2 days b. 53.7 days c. 42.9 days d. 114.4 days

Cost-benefit principle

The second major limitation on internal control is the cost-benefit principle, which dictates that the costs of internal controls must not exceed their benefits. Analysis of costs and benefits must consider all factors, including the impact on morale. Managers must establish internal control policies and procedures with a net benefit to the company