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