ACCT 225 Chapter 4

What is Internal Control

1.) companies plan to safegaurd assets 2.) improve accuracy and reliability of accounting info

Which of the following is an example of a detective control in a company? A.) Accounting personnel routinely reconciles the company's cash records with those of its bank to identify discrepancies. B.)Only senior managers are authorized to make purchases over a certain amount. C.) Electronic records are backed up daily, and require user-ID and password for access. D.) Concession supplies are kept in a locked room with access allowed only to authorized personnel.

A

Which account would be credited when a firm pays for supplies using a credit card? Notes Payable Cash Service Fee Expense Accounts Payable

Accounts payable

Which of the following is an example of a preventive control in a company? A.) The management evaluates the overall performance by comparing sales for the current year with sales for the previous year. B.) Employees responsible for making cash disbursements are not in charge of cash receipts. C.) Management periodically determines whether the amount of physical assets of the company match the accounting records. D.) Actual performance of individuals are routinely checked against their expected performance.

B

What is Risk Assessment (internal control 2)

Consideration of internal and external risks (internal: unsafe lighting, faulty video projections) (external: parking lot saftey, consumer demand)

5 components of internal control

Control Environment Risk Assessment Control Activities Monoriting Information and Communication

What are Detective controls (Internal Control 3C)

Controls to find errors or fraud after they occured (reconciliations, audits)

A landscaping company accepts MasterCard as payment for $1,000 worth of services. MasterCard charges a service fee of 2 percent. Which of the following would be recorded by the store? A.) Debit $20 to Service Fee Expense B.)Debit $1,000 to Cash C.)Credit $980 to Service Revenue D.)Credit $980 to Cash

Debit $20 to Service Fee Expense

Identify cash equivalents from the listed items. Select all answers that apply. Money market funds Supplies Three-month Treasury bills Accounts receivable Prepaid rent

Money market funds Three-month Treasury bills

What is Collusion

When two more more people act in coordination to get around internal controls

Recording the establishment of a petty cash account will include _____. a debit to Accounts Payable a credit to Petty Cash a debit to Miscellaneous Expense a credit to Cash

a credit to cash

What is Information and Communication (internal Control 5)

all of them together, having a good system of accounting

Checks Outstanding

check that has not been subtracted from

What does the Committee of Sponsoring Organizations do?

improve quality of financial reporting through effective internal controls

What is monitoring? (Internal Control 4)

need to monitor the internal controls on an ongoing basis

What are Preventative Controls (Internal Control 3B)

prevent errors or fraud before they can happen (separation of duties, physical duties)

What are Control Activities (internal control 3A)

procedures to protect a companies assets include preventative and detective controls

What are cash equivalents

short term investments that have maturity date no longer than 3 months

According to the provisions of the Sarbanes-Oxley Act, audit firms are not allowed to audit public companies whose chief executives worked for the audit firm and participated in that company's audit during the preceding year true or false

TRUE

The accountant at Zepha Consulting works with the manager authorized to make purchases in order to steal cash from the company. This is an example of collusion. True or False

TRUE

Reasons for Incorrect Financial Statements

Errors and Fraud

After the passing of the Sarbanes-Oxley Act, auditors of public companies can perform non-audit services, such as consulting, for their clients. True or False

FALSE

Only the best internal control systems can completely eliminate financial misstatements.

FALSE

The corporate form of business is an entity separate from its owners. This means that corporate executives need not personally certify the company's financial statements and financial disclosures. True or False

FALSE

The employee who deposits cash and checks into the company's bank account each day should also receive cash and checks. TRUE or FALSE

FALSE

deposits outstanding

Receipts of company that have not been recorded by the bank

Steps of Bank Reconcilation

Reconcile banks cash balance Reconcile Companies cash balance update cash account from step 2

True

Recording Revenue is similar for debit card transactions and credit card transactions (T/F)

What is Control Enviornment (internal control 1)

Sets overall Ethical Tone of company with respect to internal control (employees replicate good behavior, also replicate unethical behavior)