Chapter 7 Acct

"A Paid Check"

"A Canceled Check"

Human Resource Controls

1. Bond employees who handle cash 2. Rotate employees' duties and require employees to take vacations. 3. Conduct thorough background checks.

Basic Principles of Cash Management

1. Increase the speed of receivables collection 2. Keep inventory levels low 3. Monitor payment of liabilities. 4. Plan the timing of major expenditures 5. Invest Idle Cash

The Need for Reconciliation

1. Time lags that prevent one of the parties from recording the transaction in the same period. 2. Errors by either party in recording transactions.

Petty Cash Fund

A cash fund used to pay relatively small amounts.

NSF Check

A check that is not paid by a bank because of insufficient funds in a bank account. Non Sufficient Funds.

Electronic Funds Transfer (EFT) System

A disbursement system that uses wire, telephone, or computer to transfer cash from one location to another. Result in better internal control

Fraud

A dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.

Voucher System

A network of approvals by authorized individuals, acting independently, to ensure that all disbursements by check are proper.

Bank Statement

A statement received monthly from the bank that shows the depositor's bank transactions and balances.

Internal Control

All the related methods and measures adopted within an organization to safeguard assets and enhance the reliability of accounting records, increase efficiency of operations, and ensure compliance with laws and regulations. 1. A Control Environment 2. Risk Assessment 3. Control Activities 4. nformation and Communication 5. Monitoring

Voucher

An authorization form prepared for each expenditure in a voucher system.

Establishment of Responsibility

Control is most effective when only one person is responsible for a given task. Often requires limiting access only to authorized personnel.

Restricted Cash

Cash that is not available for general use but instead is restricted for a particular purpose.

Outstanding Checks

Checks issued and recorded by a company that have not been paid by the bank.

Internal Auditors

Company employees who continuously evaluate the effectiveness of the company's internal control systems.

6 Principles of Control Activities

Establishment of Responsibility Segregation of duties Documentation procedures Physical Controls Independent internal Verification Human Resource Controls

Cash Disbursement Controls

Internal control over cash disbursements is more effective when companies pay by check or electronic funds transfer (EFT) rather than by cash.

Bonding

Involves obtaining insurance protection against theft by employees.

Independent Internal Verification

Involves the review of data prepared by employees. Companies should verify records periodically. Discrepancies and exceptions should be reported.

The Sarbanes-Oxley Act (SOX)

Law that requires publicly traded companies to maintain adequate systems of internal control.

Risk-Free Investment

Means there is no concern that the party will default on its promise to pay its principle and interest.

Liquid Investment

One with a market in which someone is always willing to buy or sell the investment.

Fraud Triangle

Opportunity Financial Pressure Rationalization

Documentation Procedures

Provide evidence that transactions and events have occurred. Companies should use prenumbered documents that recent transactions from being recorded more than once. Should require that employees promptly forward source documents for accounting entries to the accounting department. Helps enure timely recording of transaction.

Cash

Resources that consist of coins, currency, checks, money orders, and money on hand or on deposit in a bank or similar depository. Most liquid asset owned by the company.

Physical Controls

Safeguarding of assets, accuracy and reliability of the accounting records. Safes, vaults, locks, keys, alarms, monitors, clocks.

Cash Equivalents

Short-term, highly liquid investments that are both: Readily convertible to known amounts of cash So near their maturity that their market value is relatively insensitive to changes in interest rates.

Cash Budget

Shows anticipated cash flows, usually over a one to two year period.

Fraud and Cash

The asset most susceptible to fraudulent activities.

Bank Reconciliation

The process of comparing the bank's account balance with the company's balance, and explaining the differences to make them agree. MADE FROM THE BANKS PERSPECTIVE. Every deposit the bank receives is an increase in the bank's liabilities (an account payable to the depositor).

Segregation of Duties

The work of one employee should, without a duplication of effort, provide a reliable basis for evaluating the work of anther employee. Making one individual responsible for related activities increases the potential for errors and irregularities. Assign related purchasing activities and sales activities to different individuals. The custodian of the asset is not likely to convert the asset to personal use when one employee maintains the record of the asset, and a different employee has physical custody of the asset.

Reconciliation Procedure

To obtain maximum benefit from a bank reconciliation, an employee who has no other responsibilities related to cash should prepare the reconciliation. STEPS 1. Deposits in Transit 2. Outstanding Checks 3. Errors 4. Bank Memoranda