Ch 4 Cash and Internal Controls

Cash equivalents

Short term investments that have a maturity date no longer than 3 months from the date of purchase

NSF checks

Checks drawn on nonsufficient funds, or "bad" checks from customers

Internal controls

A company's plans to (1) safeguard the company's assets and (2) improve the accuracy and reliability of accounting information

Separation of duties

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

Outflows

Cash ________ related to operating activities exceed inflows; cash ________ related to expense activities exceed cash inflows related to revenue activities

Deposits outstanding

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

Checks outstanding

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

Purchase cards

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

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

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

Investing activities

Include cash investments in long term assets and investment securities

Financing activities

Include transaction designed to raise cash or finance the business; 2 ways: borrow cash from lenders or raise cash from stockholders; this involves liabilities and stockholders' equity

Control activities

Includes a variety of policies and procedures used to protect a company's assets; 2 types are preventive and detective

Operating activities

Includes cash transactions involving revenue and expense events during the period; includes the cash effect of the same activities that are reported in the income statement to calculate net income

Sarbanes Oxley Act

Known 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

Bank reconciliation

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

Fraud

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

Cash

Only transactions involving ____ affect a company's cash flow

COSO

The Committee of Sponsoring Organizations of the Treadway Commission provided a framework for designing an internal control system

Occupational fraud

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

Timing differences

This in cash occurs when the company records transactions either before or after the bank records the same transactions

Detective

This type of control includes: reconciliation, performance reviews, and audits

Preventive

This type of control includes: separation of duties, physical controls, proper authorization, employee management, and E-commerce controls

Occupational

This type of fraud has 2 sources: misuse of company resources and financial statement manipulation

Collusion

Two or more people acting in coordination to circumvent internal controls

Top executives

Who takes final responsibility of the establishment and success of a company?

Reconciling

___________ the bank account involves these steps: (1) _________ the bank's cash balance, (2) _________ the company's cash balance, and (3) update the company's cash account by recording the items identified in step 2