Chapter 8-Sarbanes-Oxley, Internal Control, and Cash

What are the elements of internal control?

1) Control environment; 2) Risk assessment; 3) Control procedures; 4) Monitoring; and, 5) Information and Communication.

What are cash equivalents?

A company may have excess cash being held on a temporary basis. In such cases, the company normally invests the excess cash in highly liquid investments in order to earn interest on its deposits. Examples of these highly liquid investments include U.S. Treasury Bills, Commercial Paper, and Money Market Accounts.

What is a line of credit?

A pre-approved amount a bank is willing to lend to a customer upon request. Once it is paid off in full, the amount the customer can borrow reverts back up to the limit under this arrangement. It is similar to a bank loan, except that a loan goes away once it is paid in full by the customer.

What is a bank statement?

A summary of all transactions is mailed to the depositor or made available online, usually at the end of the month. The summary shows the beginning bank balance, additions, deductions, and the ending balance in the account.

What is a bank reconciliation?

An analysis of the items and amounts that result in the cash balance reported in the bank statement that differ from the balance of the cash account in the general ledger account.

What is a voucher?

Any document that serves as proof of authority to pay cash or issue an electronic funds transfer. An invoice that has been approved for payment can be considered to be one of these.

What are compensating balance agreements?

Banks may require that companies maintain minimum cash balances in their bank accounts. These minimum balances are often required by the bank as part of a loan agreement or line of credit.

What are outstanding checks?

Checks that have been written by the account holder but have not cleared the bank as of the date of the bank statement.

What are special purpose funds?

Companies often use other cash funds for special needs, such as payroll or travel expenses. These funds are established and controlled in a manner similar to that of a petty cash fund.

What are NSF checks?

Customers' checks returned for not sufficient funds. Customers' checks that were initially deposited, but were not paid by the customer's bank.

What are deposits in transit?

Deposits that have been recorded in the depositor's ledger account but have not been posted by the bank as of the date of the bank statement.

What are the limitations of internal controls?

Internal control systems can provide only reasonable assurance for safeguarding assets, processing accurate information, and compliance with laws and regulations. In other words, a quality internal control system is not a guarantee against fraud or misrepresentation.

What are internal controls?

The methods and measures, policies and procedures, adopted by an organization to safeguard its assets.

What are the internal controls of cash?

The methods and measures, policies and procedures, adopted by an organization to safeguard its cash. The methods and procedures include the following: 1) using a voucher system; 2) preparing month-end bank reconciliations; 3) reconciling the cash drawer at the end of the workday; and, 4) separating the accounting for cash from the depositing of cash.

What is the control environment?

The overall attitude of management and employees about the importance of controls. Three factors influence this attitude: 1) Management's philosophy and operating style; 2) The company's organizational structure; and, 3) The company's personnel policies

What is the Sarbanes-Oxley Act?

The purpose of this Act is to restore public confidence and trust in the financial reporting of U.S. companies. The Act only applies to companies whose stock is traded on public exchanges, referred to as publicly held companies.

What are control procedures?

These provide reasonable assurance that business goals will be achieved, including the prevention of fraud. They include the following items: 1) Competent personnel, rotating duties, and mandatory vacations; 2) Separating responsibilities for related operations; 3) Separating operations, custody of assets, and accounting; and, 4) proofs and security measures.

What is the cash short and over account?

This account is used to reconcile the difference between the amount of cash on hand and the amount of cash sales.

What is a petty cash fund?

This fund is established by estimating the amount of payments needed during the period, such as a week or a month. A check is then written and cashed for this amount. The written check is typically for a small amount of money.

What are the objectives of internal control?

To provide reasonable assurance that: 1) Assets are safeguarded and used for business purposes; 2) business information is accurate; and, 3) employees and managers comply with laws and regulations.