Chapter 4 quiz

companies issue incorrect financial statements for two reasons

errors and fraud

bank reconciliation

matching balance of cash in the bank account with the balance of cash in the company's own records

types of detective controls

reconciliation performance review audits

bank collections are becoming in these business settings

recurring payments form customers, real estate transactions, collection agencies, and lending arrangements

Acceptance of credit cards provides an additional control by

reducing employees' need to directly handle cash

strong internal control systems allow greater reliance by investors on

reported financial statements

provisions included in the Sarbanes-Oxley Act

require that audit firms are hired by the audit committee of the board of directors, and require auditors to retain work papers for 7 years

Some common items that will increase the company's cash balance once the reconciliation occurs

Bank collections on the company's behalf offer a convenient and safer way for the company to collect cash companies may also earn interest based on the average daily balance of their checking or savings account

E-commerce controls

E-commerce refers to the wide range of electronic activities of a company

other times in the reconciliation that will decrease the company's cash balance

NSF checks occur when customers' checks are written on "non sufficient funds." employees sometimes use debit cards to make purchases, which the company's accountant may not now until they examine the bank statement Electronic funds transfers are automatic transfers from one bank account to another (for example mortgage or utility bill) banks charge service fees which may not be known by teh company until examination ob the ban statement

what requires a journal entry following a bank reconciliation

NSF checks, Notes collected by the bank

common controls over cash receipFcash dts include:

Open mail each day, and make a list of checks received, including the amount and payer's name designate an employee to deposit cash and checks into the company's bank account each day, different from the person who receives cash and checks Have another employee record cash receipts in the accounting records as soon as possible. Verify cash receipts by comparing the bank deposit slip with the accounting records Accept credit cards or debit cards, to limit the amount of cash employees handle

cash equivalents

Short-term investments that have a maturity date no longer than three months from the date of purchase

internal controls

a company's plans to safeguard the company's assets and improve the accuracy and reliability of accounting information

COSO designed a framework for what?

a design for an internal control system consisting of five components

control activities

a variety of policies and procedures used to protect a cmopany's assets

we adjust the bank's cash balance by

adding deposits outstanding and subtracting checks outstanding, and look for and correct and bank errors

steps necessary to reconcile the bank balance and the cash account balance

adjust bank's cash balance, record items that reconcile the company's cash balance and adjust the company's cash balance

in a bank reconciliation, which adjustments will require journal entries by the company

adjustments to the balance per books for items discovered on the bank reconciliation that were not yet recorded on the books

separation of duties

authorizing transactions, recording transactions, and controlling related assets should be separated among employees

Why is control over cash receipts and cash disbursements an important part of a company's overall internal control system?

because cash is the asset that is most susceptible to employee fraud

errors

can be made either by the company or its bank and may be accidental or intentional

risk assessment includes

careful consideration of internal and external risk factors

which asset is the most susceptible to employee fraud?

cash

checks outstanding

cash disbursements that have been recorded in the company's accounting records but are not yet recorded by the bank

Deposits outstanding

cash receipts of the company that have not been added to the bank's record of the company's balance

when a customer uses cash or a check to make a purchase, the transactions is recorded as a

cash sale

NSF Checks

checks drawn on non sufficient funds, or "bad" checks from customers

Checks outstanding

checks the company has written that have not been subtracted from the bank's record of the company's balance

errors:

companies sometimes make accidental errors in recording (or failing to record) transactions or in applying accounting rules

Sarbanes-Oxley act applies to

companies that are required to file with the SEC

purchase cards

company-issued debit cards or credit cards that allow authorized employees to make purchases on behalf of the company

What requirements for corporate accountability are included in the Sarbanes-Oxley Act?

corporate executives may be criminally liable for fraudulent financial statements corporate executives must personally certify the financial statements

Bank statements refer to a deposit as a

credit

cash

currency, coins, balances in savings and checking accounts, items acceptable for deposit in these accounts (such as checks received from customers), credit card and debit card sales, and cash equivalents

bank statements refer to a withdrawal as a

debit

detective controls

designed to detect errors or fraud that already have occurred

preventive controls

designed to keep errors or fraud from occurring in the first place

accidental error

done messed up

rationalization

justification for the deceptive act by the one committing the fraud

Sarbanes-Oxley act

know as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly referred to as SOX; the act established a variety of guidelines related to auditor-client relations and internal control procedures

controls over cash disbursements

make all disbursements, other than very small ones, by check, debit card, or credit card (this provides a permanent record of all disbursements.) authorize all expenditures before purchase and verify the accuracy of the purchase itself. The employee who authorizes payment should not also be the employee who prepares the check make sure checks are serially numbered and sign only by authorized employees. require two signatures for larger checks periodically agree amounts shown in the debit card and credit card statements against purchase receipts. The employee verifying the accuracy of the debit card and credit card statements should not also be the employee responsible for actual purchases set maximum purchase limits on debit cards and credit cards. Give approval to purchase above these amounts only to upper-level employees. employees responsible for making cash disbursements should not also be in charge of cash receipts

reconciliations

management should periodically determine whether the amount of physical assets of the company (cash, supplies, inventory, and other property) agree with the accounting records)

internal control consists of plans to

minimize errors and theft, encourage adherence to company policies and procedures, and safeguard company assets

Two sources of occupational fraud

misuse of company resources and financial statement manipulation

components of internal control

monitoring, control activities, risk assessment, and control environment

banks charge service fees for

monthly maintenance, overdraft penalties, ATM use, wire transfers, foreign currency exchanges, automatic payments, and other account services.

fraud

occurs when a person intentionally deceives another person for personal gain or to damage that person

collusion

occurs when two or more people act in coordination to circumvent internal controls

physical controls

over assets and accounting records

types of ocntrol activities

preventive and detective

PCAOB

public company accounting oversight board

reconciling the bank account involves three steps:

reconcile the bank's cash balance reconcile the company's cash balance update the company's Cash account by recording items identified in Step 2

key provisions of the Sarbanes-Oxley Act

requiring the documentation and assessing the effectiveness of internal controls, restricting activities of auditors to prevent conflicts of interest, and requiring that corporate executives certify financial statements

types of preventive controls

separation of duties physical controls proper authorization employee management E-commerce controls

motivation

someone feels the need to commit fraud, such as the need for money

what prompted passage of the Sarbanes-Oxley Act (SOX)?

the accounting scandals in the early 2000s prompted passage of the Sarbanes-Oxley Act (SOX)

performance reviews

the actual performance of individuals or processes should be checked against their expected performance

under the Sarbanes-Oxley Act, who is responsible for the selection of a corporations auditor

the audit committee of the Board of Directors

credit card companies earn revenues primarily in two ways:

the cardholder has a specified grace period before he or she has to pay the credit card balance in full. If the balance is not paid by the end of the grace period, the issuing company will charge a fee (interest). credit card companies charge the retailer, not the customer, for the use of the credit card. This charge generally ranges from 2 to 4 percent of the amount of the sale

employee management

the company should provide employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties

intentional error

the result of theft

opportunity

the situation allows the fraud to occur

fraud triangle

the three elements necessary for every fraud

occupational fraud

the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources

financial statement manipulation

those in charge of communicating financial accounting information falsify reports

main reasons for differences in cash balances on the books and in the bank statement

timing differences or errors

proper authorization

to prevent improper use of the company's resources

final responsibility for the establishment and success in a company goes to

top executives

petty cash fund

used for small amounts of cash needed for low-cost items

Timing differences in cash occur

when the company records transactions either before or after the bank records the same transactions