ACCOUNT 244 1st Edition Exam 3Study Guide Chapters 7 10 Chapter 7 Fraud Internal Control and Cash What 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 Controlo Methods and measures adopted to 1 Safeguard assets 2 Enhance accuracy and reliability of accounting records 3 Increase efficiency of operations 4 Ensure compliance with laws and regulations o 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 is independent 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 business Application 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 take vacations 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 recordkeeping 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 records Application 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 fund Control 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 earned Reconciliation 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 Errors Reporting 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 8 What 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 The disadvantages of having accounts receivables are that people may not be able to pay Methods and Bases Companies use Direct Write off Credit losses are recorded when a customer s account is actually