ACCT ch 4

risk assessment procedures

designed to identify, analyze, and manage strategic risks and business process risks

paying for inventory

second stage of the operating cycle. Delay payments as long as possible while maintaining a good relationship with the payee.

What should be done with bank debits?

should be subtracted from the "cash balance from company records"

what should be done with outstanding checks?

should be subtracted from the "cash balance from the bank statement"

What are the five categories of control activities?

1 Clearly defined authority and responsibility 2 Segregation of Duties 3 Adequate Documents and Records 4 Safeguards over Assets and Records 5 Checks on Recorded Amounts

What are the four steps in performing a bank reconciliation?

1 Compare the deposits on the bank statement to deposits debited to the cash account. 2 Compare the paid checks that are electronically returned with the bank statement to the amounts credited to the cash account and the list of outstanding checks from prior months. 3 Look for items on the bank statement that have not been debited or credited to the cash account. 4 If the "adjusted cash balances" still aren't the same, search for errors.

cash management

1 Delaying paying suppliers, so a company can earn as much interest on their cash as possible 2 speeding up collection from customers in order to invest the cash sooner or reduce the need for additional financing 3 earning the greatest return on any excess cash

What are the three areas of company objectives

1 Operating objectives- effectiveness and efficiency of the entity's operations, including financial performance goals and safeguarding assets against loss 2 Reporting Objectives- reliability of reporting. They include internal and external financial and non-financial reporting 3 Compliance Objectives- compliance with applicable laws and regulations

what two things are cash equivalents?

1 easily convertible into known amounts of cash 2 close enough to maturity that they are relatively insensitive to changes in interest rates

What is included in the control environment?

1 philosophy and operating style of management 2 personnel policies and practices of the business 3 overall integrity, attitude, awareness, and actions of everyone in the business concerning the importance of control. (tone at the top)

What two purposes are served by reconciliation of these separately maintained records?

1 serves a control function by identifying errors and providing an inspection of detailed records that deters theft 2 serves a transaction detection function by identifying transactions performed by the bank, so the business can make the necessary entries in its records.

What are the three sources that differences between the cash account balance and the bank statement develop from?

1 transactions recorded by the business, but not recorded by the bank in time to appear on the current bank statement 2 transactions recorded by the bank, but not yet recorded by the business 3 errors in recording transactions on either set of records.

Segregation of Duties

Accounting and administrative duties should be performed by different individuals so that no one person prepares all the documents and records for an activity. Reduces the likelihood that records could be used to conceal irregularities (intentional misstatements, theft, or fraud) and increases the likelihood that irregularities will be discovered. Also reduces the likelihood of errors.

Cash over and short

An account that discrepancies between amount deposited and cash register tapes are recorded.

Information and Communication

An internal control system will be unable to help a company achieve its objective unless adequate information is identified and gathered on a timely basis. This information must be communicated to the appropriate employees in the organization.

buying inventory

First stage of the operating cycle. Important to keep inventory levels low

What does COSO stand for and what did they do?

Committee of Sponsoring Organizations of the Treadway Commission. Identified five components of an internal control system: the control environment, risk assessment, control activities, information and communication, and monitoring activities.

Debit and Credit Memos

Debit memos recorded by the bank but not yet recorded by the business cause the bank balance to be smaller than the cash account balance. Credit memos recorded by the bank but not recorded by the business cause the bank balance to be larger than the cash account balance.

What are labeled credits on the bank statement

Deposits and other events that increase your bank account balance because they increase the bank's liability to you

For what two items are adjustments not necessary?

For outstanding checks or deposits in transit.

What are the three types of transactions recorded by the bank, but not yet recorded by the business?

Service charges, non-sufficient funds checks, and debit and credit memos

What should be done with bank credits?

Should be added to the "cash balance from company records"

Clearly defined authority and Responsibility

The authority to perform important duties is delegated to specific individuals, and those individuals should be held responsible for the performance of those duties in the evaluation of their performance.

outstanding checks

a check issued and recorded by the business that has not been "cashed" by the recipient of the check. The business has recorded the check as lowering its cash balance and the bank has not recorded the check as lowering the business's account balance because it has not been cashed.

Non-Sufficient Funds Checks (NSF)

a check that has been returned to the depositor because funds in the issuer's account are not sufficient to pay the check. Cause the bank balance to be smaller than the cash account balance.

petty cash

a fund to pay for small items for a business. Overseen by petty cash custodian

Adequate documents and records

accounting records are the basis for the financial statements and other reports prepared for managers, owners, and others both inside and outside the business. Summary records and their underlying documentation must provide information about specific activities and help in the evaluation of individual performance.

What should be done with errors made by the bank

added or subtracted from the "cash balance from bank statements"

What should be done with errors made by the company?

added or subtracted from the "cash balance from company records"

deposits in transit

an amount received and recorded by the business, but which has not been recorded by the bank in time to appear on the current bank statement. Causes the bank balance to be smaller than the business's cash account balance.

What is cash over and short usually treated as?

an income statement account. is reported as a part of other expenses or other revenues.

safeguards over assets and records

both assets and records must be secured against theft and destruction. This requires physical protection of the assets.

For what items are adjustments necessary?

company errors, bank charges or interest that the company does not find out about until receiving the bank statement.

Accounting system

consists of the methods and records used to identify, measure, record, and communicate financial information about a business.

bank reconsiliation

ensures that the accounting records are consistent with the bank's accounting records by reconciling any differences.

What is another source of difference between a business's cash account balance and the bank balance?

errors

service charges

fees charged by the bank for checking account services. Causes the bank balance to be smaller than the business's cash account balance.

cash equivalents

include all highly liquid investments with an original maturity of 3 months or less at date of inception.

internal control system

includes all the policies and procedures established by top management and the board of directors to provide reasonable assurance that the company's objectives are being met.

What are Porter's Five Forces?

industry forces such as competitors, customers, substitute products or services, suppliers, and threat of new competitors

Business process risks

internal processes of the company, specifically how the company allocates its resources to meet its objectives.

short term investments

keep bank balances low because low interest. Put it in small term investments.

What are PEST factors?

macro factors such as political, economic, social, and technological.

Common business prcesses

materials acquisition, production, logistics and distribution, branding and marketing, and human resources.

What are the two categories of transactions recorded by the business, but not yet recorded by the bank?

outstanding checks and deposits in transit

What does the petty cash custodian do?

pays for small dollar amounts directly from the fund and reimburses employees who have receipts for items that they've bought. Submits all receipts and is reimbursed.

Control activities

policies and procedures top management establishes to help insure that its objectives are met.

Strategic risks

possible threats to the organization's success in accomplishing its objectives and are external to the organization.

Monitoring

process of tracking potential and actual problems in the internal control system. Accomplished through normal supervising activities such as when a manager asks a subordinate how things are going. For larger organizations- internal audit group. This allows the organization to identify potential and actual weaknesses that could, if uncorrected, produce problems.

Checks on recorded amounts

recorded amounts should be checked by an independent person to determine that amounts are correct and that they correspond to properly authorized activities. Include clerical checks, reconciliations, comparisons of asset inspection reports with recorded amounts, computer-programmed controls, and management review of reports.

cash overage

requires a credit to cash over and short

cash shortage

requires a debit to cash over and short

bank statement

shows the beginning and ending account balance and the individual deposits and withdrawals recorded by the bank during the period. Is a copy of the bank's accounting records showing each customer the increases and decreases in their balances.

Control environment

the collection of environmental factors that influence the effectiveness of control procedures.

What should be done about deposits in transit?

they should be added to the "cash balance from the bank statement"

selling inventory

third state of the operating cycle. increasing speed of receivable collections.

Operating cycle

time elapsed between the purchase of goods for resale and the collection of cash from customers. Typically a year or less.

What are labeled debits on the bank statement?

withdrawals and other events that decrease your bank account balance because they decrease the bank's liability to you.