ACG2021 Test 3 Notes Chapter 7 Cash Internal Control Fraud A dishonest act by an employee that results in personal benefit to the employee at a cost to the employer o Three factors that contribute to fraudulent activity 1 Opportunity 2 Financial Pressure 3 Rationalization The Sarbanes Oxley Act o Companies must Develop principles of control over financial reporting Continually verify that controls are working o Independent auditors must attest to the level of internal control o SOX created the Public Company Accounting Oversight Board PCAOB o Two types 1 Fraudulent Financial Reporting 2 Misappropriation of Assets o Internal Control 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 Five Primary Components 1 Control environment o Tone at the top 2 Risk assessment o Where are the risks 3 Control activities o What activities can help reduce risk 4 Information and communication o Within external 5 Monitoring o After the system is in place is it working o 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 Authorization approval Recording Custody Documentation Procedures companies should use prenumbered documents and all documents should be accounted for o Independent Internal Verification 1 Records periodically verified by an employee who is independent 2 Discrepancies reported to management o Human Resource Controls 1 Bond employees Bonded getting insurance 2 Rotate employees duties and require vacations 3 Conduct background checks o Limitations of Internal Control Costs should not exceed benefit Human element Size of the business Cash Receipts Controls o Establishment of Responsibility only designated personnel are authorized to handle cash receipts o Documentation Procedures use remittance advice cash register tapes and deposit slips o Independent Internal Verification supervisors count cash receipts daily treasurer compares total receipts to bank deposits daily o Segregation of Duties different individuals receive cash record cash receipts and hold the cash o Physical Mechanical and Electronic Controls store cash in safes and bank vaults limit the access to storage areas use cash registers o Human Resource Controls bond personnel who handle cash require employees to take vacations conduct background checks Over the Counter Receipts from physical custody o Important internal control principle segregation of record keeping Permitting only designated personnel to handle cash receipts is an application of the principle of establishment of responsibility Cash Disbursements Controls o Generally internal control over cash disbursements is more effective when companies pay by check rather than by cash Applications Voucher system Petty cash fund The use of prenumbered checks in disbursing cash is an application of the principle of documentation procedures Control Features Use of a Bank o Contributes to good internal control over cash Minimizes the amount of currency on hand Creates a double record of bank transactions Bank reconciliation o Bank Statements Debit Memorandum taking money out of our account Credit Memorandum added money to our account Bank service charge NSF not sufficient funds Collect notes receivable Interest earned The control features of a bank features of a bank account do NOT include Reconciling the Bank Account o Reconcile balance per books and balance per bank to their adjusted corrected cash balances Reconciling Items 1 Deposits in transit 2 Outstanding checks 3 Bank memoranda 4 Errors Reconciliation Procedures Bank Reconciliation o Bank Statement o Things bank didn t know Books Thinks we didn t know o The two equal each other in the end o EX Deposits in transit bank statement Outstanding checks bank statement Error balance per books Bank memoranda balance per books Debits subtraction Credits addition The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is bank service charges Reporting Cash o Most liquid asset listed first o Cash equivalents short term highly liquid investments Must be readily convertible to known amounts of cash Close to maturity o Restricted cash Which of the following statements correctly describes the reporting of cash Cash is listed first in the current assets section Managing and Monitoring Cash o Basic Principles of Cash Management 1 Increase the speed of receivables collection 2 Keep inventory levels low 3 Delay payment of liabilities 4 Plan the timing of major expenditures 5 Invest idle cash o The Cash Budget Shows anticipated cash flows usually over a one to two year period Contributes to more effective cash management o Petty Cash Fund used to pay small amounts imprest account Involves 1 Establishing the fund 2 Making payments from the fund 3 Replenishing the fund EX If establishing a petty fund Dr Petty Cash Cr Cash Chapter 10 Liabilities Current Liabilities o Current liability is debt with two key features 1 Company expects to pay the debt from existing current assets or through the creation of other current liabilities Company will pay the debt within one year or the operating cycle whichever is longer To be classified as a current liability a debt must be expected to be paid by creating other current liabilities o Notes Payable Written promissory note Require the borrower to pay interest Those due within one year of the balance sheet date are usually classified as current liabilities Dr Cash Cr Note Payable o Sales Tax Payable Sales taxes are expressed as a stated percentage of the sales price Retailer collects tax from the customer Retailer remits the collections to the state s department of revenue o Unearned Revenue revenues that are received before the company delivers goods or provides services o Current Maturities of Long Term Debt Portion of long term debt that comes due in the current year No adjusting entry required o Payroll and Payroll Taxes Payable The term payroll pertains to both Salaries managerial administrative and sales personnel monthly or yearly rate Wages store clerks factory employees and manual laborers rate per hour Determining the payroll involves computing three amounts 1 gross earnings 2 payroll deductions and 3 net pay Payroll tax expense
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