Acct- Ch.5

Outstanding check

A lag that can occur when you write a check to another company, but your bank doesn't find out about it until that company deposits the check in its own bank. -No journal entry required

Identify whether the following increases (+) or decreases (-) the risk of fraud, arising from incentives (I), opportunities (O), or rationalizing/concealing (R).: - Blah company was notorious for its "rank and yank" practice that involved ranking the financial performance of each business unit & then firing managers in the lowest 20%.

+I (Greater pressure to report better financial results)

Journal entries affect the Petty cash account only when.....

- A petty cash fund is established (by writing a check to the petty cash custodian) or - When its approved total increases or decreases

Internal controls

- Actions taken to promote efficient and effective operations, protect assets, enhance accounting info, and adhere to laws and regulations. - Behind the scenes practices that help businesses achieve their objectives.

What does a company use to eliminate the risk of a bank over or under paying a employee when using EFT?

- Companies use a Imprest System: A process that controls the amount paid to other by limiting the total amount of money available for making payments to others.

Remittance Advice

-Letter sent by a customer to a supplier to inform them that their invoice has been paid. - Includes: customer name, invoice #, amount due, due date, and amount enclosed. - They are stamped with "For Deposit Only" allowing bank to deposit directly in company's account rather than exchanging it for cash. - Given to accounting department

Identify whether the following increases (+) or decreases (-) the risk of fraud, arising from incentives (I), opportunities (O), or rationalizing/concealing (R).: - Blah company has a strong board of directors, according to Corporate Responsibility Magazine.

-O (Strong oversight by directors)

Identify whether the following increases (+) or decreases (-) the risk of fraud, arising from incentives (I), opportunities (O), or rationalizing/concealing (R).: - Blah company conducts preemployment screening before hiring anyone.

-R (Less likely to hire employees who will rationalize/conceal fraud ((Crazies))

What are the five control components that apply to all levels of a company??

1. Control Environment 2. Risk Assessment 3. Control Activities 4. Information & Communication 5. Monitoring Activities

Name the five components most organizations use as a framework with analyzing their internal control systems....

1. Control Environment- Refers to the attitude people in the organization hold regarding internal control. -Strong control environment helps employees understand the value of internal controls to company's success. 2. Risk Assessment- Managers should continuously assess potential for fraud & other risks from company success. 3. Control Activities- Include work responsibilities completed by employees to reduce risks to an acceptable level. 4. Information & Communication- Communicates info about activities affecting company to support sound decision making. 5. Monitoring Activities- The internal control system is evaluated often to determine if it's working as intended. -Deficiencies is communicated to those responsible for action, senior management and/or board of directors.

What are the three key requirements of the SOX Act?

1. Counteract incentives- Those who misrepresent financial results in reporting face penalties such as: -Fines of up to $5 million plus repayment of any fraud proceeds. - Maximum jail sentences have been increased to 20 years, but can add up due to letting judges declare consecutive jail terms for each violation. 2. Reduce Opportunities- This part of the fraud triangle is most affected by SOX. To reduce fraud opportunities and improve companies' internal control over financial reporting, SOX requires all public companies to: - Establish an audit committee of independent directors, this committee ensures company's internal control and audit functions of company are effective - Evaluate & report on the effectiveness of internal control over financial reporting, optional for small companies 3. Encourage Honesty- public companies must have tip lines.

What are some reasons your bank may not know about when completing a bank reconciliation?

1. Errors made by the bank 2. Time lags: - Deposits you made recently - Checks you wrote recently

List the five key common Principles of Internal Control

1. Establish Responsibility- Assign each task to one one employee, allowing easy view of who caused any error or thefts that occur. 2. Segregate Duties- Do not make one employee responsible for all parts of a process 3. Restrict Access- Do not provide access to assets or info unless needed to fulfill assigned responsibilities 4. Document Procedures- Prepare documents to show activities that have occurred. 5. Independently Verify- Check others' work - A business can perform this in 3 ways: 1) Hire an external auditor 2)Can be made part of a person's job 3) Comparing company's accounting info to info kept by a independent 3rd party.

What are the four Organizational levels of responsibility that DO NOT apply to all levels of a company??

1. Function 2. Unit 3. Division 4. Organization

What are the three ways a company can Independently Verify? <-- one of the key principles of internal control

1. Hire a external auditor 2. Can be made part of a employee's job 3. Compare company's accounting info to info kept by an independent 3rd party.

What are the three reasons why an employee would commit fraud? (Think of the fraud triangle)

1. Incentive- Greater pressure to report better financial results -Employee has a reason for committing fraud. - Can make the business appear successful to attract investors, meet loan requirements, and bring in new business partners 2. Opportunity- Employee has a means of committing fraud. - Usually stem from weak internal controls. 3. Rationalization- Employee perceives the misdeed as unavoidable or justified (may feel they are underpaid, so fraud is their way of getting even or getting what they think they deserve). - Others rationalize their actions through a feeling of personal entitlement

What are some reasons you may not know about when completing a bank reconciliation? You'll need to change cash records only for these reasons!!

1. Interest the bank has put into your account 2. EFTs 3. Service charges taken out of your account 4. Customer checks you deposited for which the customer had non-sufficient funds (NSF) 5. Errors made by you

Indicate whether (yes or no) each of the following items discovered when preparing a bank reconciliation will need to be recorded in the Cash account in the Company's books 1. Outstanding checks 2. Deposits in transit 3. Bank service charges 4. NSF check that were deposited

1. No (Remember it was already recorded when written) 2. No (Already recorded when cash was deposited) 3. Yes (Will be recorded as decrease cash & increase Office expenses) 4. Yes (Will be recorded as decrease in cash & increase in accounts receivable)

What are the three control objectives that apply to all levels of a company??

1. Operations 2. Reporting 3. Compliance

Describe how you use the three objectives of Internal Control in your daily life?

1. Operations- Locking your doors 2. Reporting- Checking accuracy of banking records 3. Compliance- Staying within the speed limit when driving

Internal Control consists of the actions taken by people at every level of an organization to achieve it's objectives relating to what??? (3 of them)

1. Operations- These objectives focus on completing work effectively & protecting assets by reducing risk of fraud. 2. Reporting- Include producing reliable and timely accounting info for use by people internal and external to the organization. 3. Compliance- Focuses on adhering to laws and regulations.

List the steps in the voucher system (5)

1. Request goods or services be ordered (Purchase requisition doc) 2. Order goods or services (Purchase order doc) 3. Receive goods or services (Receiving report doc) 4. Obtain bill for goods or services (Supplier invoice doc) 5. Write check or EFT to pay bill (Company check or EFT transaction number)

How do bank services help businesses control cash?? (3)

1. Restricting Access- Businesses need to keep only a limited amount of cash on hand due to banks providing a secure place to deposit cash 2. Documenting Procedures- By processing payments made by check or EFT, banks document transactions 3. Independently Verifying- Banks can verify the company's records are accurate

What are the two main reasons why Internal Control for cash is important?

1. Volume of cash transactions is huge, causing risk of cash handling errors significant. 2. Cash is "owned" by the person who possesses it, it poses a high risk of theft.

Sarbanes- Oxley Act (SOX)

A set of laws established to strengthen corporate reporting in the United States. - When investors lose, the economy suffers. To reduce fraud among public companies, the U.S introduced this act - Most significant changes to financial reporting in the US since the Securities Acts (1930s) - 3 Key requirements

Petty Cash Fund

A system to reimburse employees for payment they have made on behalf of the company.

Which of the following is NOT a SOX requirement intended to reduce fraud opportunities? A. Increase fines & jail sentences for fraud perpetrators B. All public companies establish an audit committee of independent directors C. Management of all public companies evaluates & reports on the effectiveness of internal control over financial reporting D. External auditors of large public companies evaluate & report on the effectiveness of internal control over financial reporting.

A. Increase fines & jail sentences for fraud perpetrators

Describe Operations, reporting, and compliance when it comes to internal control

All consist of the actions taken by people/employees at every level of an organization to achieve these objectives. 1. O- Completing work effectively & protecting assets 2. R- Producing accounting work by internal & external people 3. C- Follow laws and regulations

What is the anonymous hotline?

Allows anyone to tip off independent auditors about suspected fraud. - A principle of internal control, but not one of our 5 common ones - EX: American Express alerted Walmart to more than $1.7 million in transfers from a Walmart bank account to its VP' personal CC.

What are tip lines?

Allows employees to secretly submit concerns about questionable accounting or auditing practices. - Part of Encouraging Honesty required by SOX - Required for public companies - SOX grants legal protection to whistleblowers so they aren't retaliated against by those charged with fraud.

Fraud

An attempt to deceive others for personal gain.

Segregation of Duties

An internal control designed into the accounting system to prevent an employee from making a mistake or committing a dishonest act as part of one assigned duty & then also covering it up through another assigned duty. - One of the key Principles of internal control!

If a cashier rung up sales totaling $6,100 but had only $6,097 to deposit, how would the journal entry look??

Assets = Liabilities + Stockholders' Equity cash +6,097 sales revenue (+R) +6,100 cash shortage (+E) -3 Debit Credit Cash 6,097 Cash Shortage 3 Sales Revenue 6,100

Which of the following correctly describes how to report cash? A. Restricted cash is always reported as a current asset B. Cash can be combined with cash equivalents C. Cash can be combined with restricted cash D. Cash equivalents can be combined with restricted cash

B. Cash can be combined with cash equivalents

Which component of internal control systems includes various work responsibilities & duties completed by employees to reduce risks to an acceptable level?

Control Activities! All components: 1. CE- Attitude, value, polices set by board of dir & sr managers 2. RA- Assessments preventing future fraud & risks by managers 3. CA- Employees = reduce risks at acceptable level 4. I&C- Communication occurs regarding activities affecting company to support decision making. 5. MA- Making sure internal control system works as intended. Sr management & board of directors take actions if isn't working.

What are the three categories of employee fraud?

Corruption- Misusing one's position for inappropriate personal gain. Asset Misappropriation- Theft (embezzlement). Cash is usually the target, but other assets can be misappropriated. Financial Statement Fraud- Misreporting amounts in the financial statements, usually to portray more favorable financial results than what actually exist.

A bank statement includes?

Current balance: $$ Record keeping: Date Trans Des Withdrawals Deposits Balance

Which of the following internal control principles underlies the requirement that all customers be given a sales receipt? A. Segregate duties B. Establish responsibility C. Restrict access D. Document procedures

D. Document procedures

How do you process/enter an EFT journal entry?

Debit cash & credit accounts receivable from each customer.

True or False: Internal controls can always prevent and detect errors & fraud

FALSE - It can never be completely prevented for two reasons: 1. A company will apply internal controls only to the extent their benefits exceed their costs. 2. Internal controls can fail as a result of human error fraud. - People do make mistakes, but criminal minded employees can be known to override internal controls or collude (work together) to get around them.

True or False: As part to encourage honesty (Key requirement of SOX) SOX requires all public companies to: - Establish an audit committee of independent directors & - Evaluate and report on the effectiveness of internal control over financial reporting

FALSE - These requirements for SOX are part of key requirement of Reducing Opportunities!

If the total of cash & receipts in the cash box for petty cash is less or more, then it would be called Cash Shortage or Overage & would be reported/found where and under what??

Reported on the income statement as a miscellaneous expense or revenue

What is the difference between Petty Cash Fund and Imprest System?

Imprest System transfers funds from a general bank account to another special account. Petty Cash Fund removes cash from the company's general bank account to hold at its premises in a locked cash box.

Why was the Sarbanes-Oxley Act (SOX) created?

It was created in response to financial statement fraud that occurred in the early 2000s. - U.S. Congress passed the act in an attempt to improve financial reporting and restore investor confidence.

As part of Reducing opportunities required by SOX, the evaluation and reporting of the effectiveness of internal control over financial reporting must be completed by who???

Management and for large public companies, external auditors. - External auditors are optional for small companies since they are expensive.

Restricted Cash

NOT available for general use but rather restricted for a specific purpose -Companies sometimes have to legally do this - Found on balance sheet under current assets only if indented to be used within a year!

Businesses receive checks in the mail when customers pay... .

On account

Payments out of petty cash are NOT recorded in the accounting system until the fund is what???

Replenished!! - Due to receipts involving small amounts

When a journal entry is prepared, Sales Revenue at the amount rung up by the cash register & increase the Cash account for the amount deposited in the bank. Any difference between the two amounts is recorded in a Cash Shortage (or Overage) account, which is reported where??

Reported on the Income Statement as a Miscellaneous Expense (or Revenue).

Cash Equivalents

Short-term, highly liquid investments purchased within 3 months of maturity that can be readily converted to a specific amount of cash and which are relatively insensitive to interest rate changes. - Found on Balance Sheet under current assets!!

True or False: All companies that trade on U.S. stock exchanges must comply with requirements of Sarbanes-Oxley Act (SOX)

TRUE

True or False: We credit expenses only to reduce them

TRUE

True or False: Petty Cash is considered an asset

TRUE A = L + SE Cash -100 Petty Cash +100 _________________________________________________________ Petty Cash: 100 Debit Cash: 100 Credit

True or False: EFTs eliminate the need for some internal controls

TRUE - EFTs are a direct payment from the customer's bank account to the company's, allowing a ease on internal control due to the payment not being physically handled in anyway

True or False: Companies are required to adopt a code of ethics for their senior financial officers.

TRUE - Part of Encouraging Honesty (key requirement of SOX) -Google begins its code with "Don't be evil"

True or False: Smaller companies must have strong controls such as Independent Verification by tip management to compensate if Segregation of Duties is weak

TRUE - The cost of hiring additional employee to fully segregate duties exceed the benefits for smaller companies.

Loan Covenants

Terms of a loan agreement that, if broken, entitle the lender to renegotiate loan terms or force repayment. - May require some companies to achieve financial targets, like maintaining certain levels of assets or stockholders' equity.. if not met, the lender can increase company's interest rate, repay loan balance, or put up extra collateral to secure the loan. - Dishonest managers may misreport on reports (Financial Statement Fraud) to avoid consequences

Bank statements are presented from the bank's point of view, meaning what?

The bank views amounts in company's bank account as liabilities b/c they will eventually be used by or returned to the account holder. -Like all Liabilities, increases are reported as credits -Amounts that are removed from a bank account reduce the bank's liability, so they are reported as debits Increases- ex: deposits (credits) Decreases- ex: checks (Debits)

Bank Reconciliation

The process of comparing the bank's account balance with the company's balance, and explaining the differences to make them agree. - Key of internal control - Provides independent verification of all cash transactions, done once a month.

During the voucher system, a journal entry is not recorded until when?

The supplies ordered have been received & the accounting department has done a "three way match" with invoice matching both receiving report and purchase order. - After journal entry is recorded, the supplier invoice will be included with the other documents (purchase requisition, purchase order, and receiving report) in a voucher that will be submitted for payment.

What is the PRIMARY goal of Internal Controls for all cash payments?

To ensure the business pays only for properly authorized transactions. - Most cash payments for companies involve: 1. Writing a check or completing an EFT to a supplier or 2. Paying employees via EFT 3. Using a petty cash system- if company pays with dollar bills and coins.

What is the PRIMARY internal control goal for cash receipts??

To ensure the business receives the appropriate amount of cash & safely deposits it in the bank!

Robotic process Automation (RPA)

Using automation & artificial intelligence to create software bots that capture data, execute sequences, and make simple decisions.

What do you complete after you finished matching the up to date ending cash (also called, true or correct cash balance) balance from the company's books and bank statement?

You then prepare & record journal entries that will bring the Cash account to the up to date balance by using ONLY the company's books side of the bank reconciliation!!

Electronic Funds Transfer (EFT)

a computerized cash payments system that transfers funds without the use of checks, currency, or other paper documents - Occurs when a customer electronically transfers funds from their bank account to the company's bank account. - EFTs eliminate the need for some internal controls

Voucher System

a process for approving and documenting all purchases and payments on account - Companies usually rely on this to control transactions due to purchasing goods & services on account & pay for them later by check or EFT

Collude

to work together on a secret or illegal plan