ACCOUNT 244 1st EditionExam #3Study Guide Chapters: 7-10Chapter 7Fraud, Internal Control, and CashWhat is fraud and internal control? Identify the principles of internal control activities. Explain the applications of internal control principles to cash receipts. Explain the applications of internal control principles to cash. What is the operation of a petty cash fund? What are the control features of ta bank account. Prepare a bank reconciliation. What is the reporting of cash?Fraud and Internal Control-- Fraud- Dishonest act by an employee that results in personal benefit to the employee at accost to the employer- Internal Control-o Methods and measures adopted to: 1) Safeguard assets 2) Enhance accuracy andreliability of accounting records 3) Increase efficiency of operations 4) Ensure compliance with laws and regulationso Primary Components: 1) Control environment 2) Risk Assessment 3) Control activities 4) Information and communication 5) Monitoring- Sarbanes-Oxley Act- Applies to publicly traded U.S. Corporations; Required to maintain a system of internal control; Corporate executives and boards of directors must ensure that these controls are reliable and effective; Independent outside auditors must attest to the adequacy of the internal control system; SOX created the Public Company Accounting Oversight Board (PCAOB)Principles of Internal Control Activities - Establishment of responsibility- Control is most effective when only one person is responsible for a given task- Segregation of Duties- Related duties should be assigned to different individuals- Documentation Procedures- Companies should use prenumbered documents and all documents should be accounted for- Independent internal verification- 1) Records periodically verified by an employee who isindependent 2) Discrepancies reported to management- Human Resource Controls- 1) Bond employees 2) Rotate employees’ duties and require vacations 3) Conduct background checks- Limitations- 1) Costs should not exceed benefit 2) Human Element 3) Sixe of the businessApplication of Internal Control Principles and Cash Receipts-- Establishment of responsibility- Only designated personnel are authorized to handle cash receipts (Cashier)- Segregation of duties- Different individuals receive cash, record cash receipts, and hold the cash- Documentation Procedures- Use remittance advice (mail receipts), cash register tapes, and deposit slips - Independent internal verification- Supervisors count cash receipts daily; treasurer compares total receipts to bank deposits daily- Human Resources Controls- Bond personnel who handle cash; require employees to takevacations; conduct background checks- Physical controls-Store cash in safes and bank vaults; limit access to storage areas’ use cash registers - Over-the-counter-receipts- Important internal control principle- segregation of record-keeping from physical custody- Mail receipts- Opened by two people, clears sign the list, original copy of the list is sent to cashier’s department, and copy of the lit is sent to accounting department for recordsApplication of Internal Control Principles and Cash-- Cash Disbursements Controls- Generally, internal control over cash disbursements is more effective when companies pay by check, rather than by cash. Applications are voucher system and petty cash fund - Establishment of responsibility: Only designated personnel are authorized to sign checks (treasurer) and approve vendors- Segregation of duties- Different individuals approve and make payments; check signers do not record disbursements - Documentation procedures- Use prenumbered checks and account for them in sequence; each check must have an approved invoice; require employees to use corporate checks for reimbursable expenses; stamp invoices paid- Independent internal verification- compare checks to invoices; reconcile bank statement monthly - Human Resources Control- Bond personnel who handle cash; require employees to take vacations; conduct background checks- Physical Controls- Store blank checks in safes, with limited access; print check amounts by machine in indelible ink- Voucher System- Network of approvals by authorized individuals, to ensure all disbursements by check are proper; a voucher is an authorization form prepared for each expenditure Petty Cash- - Is used to pay small amounts. It involves: 1) Establishing the fund 2) Making payments from the fund 3)Replenishing the fundControl Features: Bank Account-- How a bank contributes to good internal control: 1) Minimizes the amount of currency on hand 2) Creates a double record of bank transactions 3) Requires a bank reconciliation- Electronic Funds Transfer (EFT) System- Disbursement systems that uses wire, telephone,or computers to transfer cash balances between locations; EFT transfers normally result in better internal control since no cash or checks are handled by company employees- Debit Memorandum- 1) Bank service charge, NSFS (not sufficient funds)- Credit Memorandum- 1) Collect notes receivables 2) Interest earnedReconciliation-- Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances.- Reconciling items: (All have time lags) 1) Deposits in transit 2) Outstanding checks 3) Bank Memoranda 4) ErrorsReporting Cash-- Cash equivalents are the same as cash. They are liquid. The company cannot touch restricted cash. And It is reported differently because it is not liquid.Exercises: E7-11; P7-3A Chapter 8What are the different types of receivables? How do companies recognize accounts receivables? What are the differences between the methods and bases companies use to value accounts receivables? Describe the entries to record the disposition of accounts receivable. Compute the maturity date of and interest on notes receivable. How do companies recognize notes receivables? How do companies value notes receivables? Describe the entries to record the disposition of notes receivable. What is the statement presentation and analysis of receivables?Types of receivables-- Accounts Receivables- Amounts owed by customers that result from the sale of goods and services- Notes Receivables- Claims for which formal instruments of credit are issued as proof of debit- Other Receivables- “Nontrade” (interest, loans to officers, advances to employees, and income taxes refundable) Accounts Receivables- - Sales are made on account because someone is having the sales on credit instead of cash; maximizes sales-