ACG2021 Test 3 NotesChapter 7- Cash & Internal Control- Fraud- A dishonest act by an employee that results in personal benefit to the employee at a cost to the employero Three factors that contribute to fraudulent activity 1. Opportunity 2. Financial Pressure 3. Rationalization- The Sarbanes-Oxley Acto Companies must Develop principles of control over financial reporting Continually verify that controls are workingo Independent auditors must attest to the level of internal controlo SOX created the Public Company Accounting Oversight Board (PCAOB)o Two types: 1. Fraudulent Financial Reporting** 2. Misappropriation of Assetso 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 environmento Tone at the top- 2. Risk assessmento Where are the risks?- 3. Control activitieso What activities can help reduce risk?- 4. Information and communicationo Within external- 5. Monitoringo 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 foro Independent Internal Verification 1. Records periodically verified by an employee who is independent 2. Discrepancies reported to managemento Human Resource Controls 1. Bond employees- Bonded- getting insurance 2. Rotate employees’ duties and require vacations 3. Conduct background checkso Limitations of Internal Control Costs should not exceed benefit Human element Size of the business- Cash Receipts Controlso Establishment of Responsibility- only designated personnel are authorized to handle cash receiptso Documentation Procedures- use remittance advice, cash, register tapes, and deposit slipso Independent Internal Verification- supervisors count cash receipts daily; treasurer compares total receipts to bank deposits dailyo Segregation of Duties- different individuals receive cash, record cashreceipts, and hold the casho Physical, Mechanical, and Electronic Controls- store cash in safes and bank vaults; limit the access to storage areas; use cash registerso Human Resource Controls- bond personnel who handle cash; require employees to take vacations; conduct background checks- Over-the-Counter Receiptso Important internal control principle- segregation of record-keeping from physical custodyPermitting only designated personnel to handle cash receipts is an application of the principle of establishment of responsibility.- Cash Disbursements Controlso Generally, internal control over cash disbursements is more effective when companies pay by check, rather than by cash. Applications:- Voucher system- Petty cash fundThe use of prenumbered checks in disbursing cash is an application of the principle of documentation procedures.- Control Features: Use of a Banko Contributes to good internal control over cash Minimizes the amount of currency on hand Creates a double record of bank transactions Bank reconciliationo Bank Statements Debit Memorandum- taking money out of our account- Bank service charge- NSF (not sufficient funds) Credit Memorandum- added money to our account- Collect notes receivable- Interest earnedThe control features of a bank features of a bank account do NOT include ……………- Reconciling the Bank Accounto 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 Reconciliationo Bank Statement Bookso Things bank didn’t know Thinks we didn’t knowo The two equal each other in the endo EX: + Deposits in transit- bank statement - Outstanding checks- bank statement Error- balance per books Bank memoranda- balance per books- Debits- subtraction- Credits- additionThe reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is: bank service charges.- Reporting Casho Most liquid asset, listed firsto Cash equivalents- short-term highly liquid investments, Must be readily convertible to known amounts of cash Close to maturityo Restricted cashWhich of the following statements correctly describes the reporting of cash? Cash is listed first in the current assets section.- Managing and Monitoring Casho 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 casho The Cash Budget Shows anticipated cash flows, usually over a one- to two-year period Contributes to more effective cash managemento 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 CashCr. CashChapter 10- Liabilities- Current Liabilitieso 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 longerTo 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 Payableo 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 revenueo Unearned Revenue- revenues that are received before the company delivers goods or provides serviceso Current Maturities of Long-Term Debt Portion of long-term debt that comes due in the current year No adjusting entry requiredo Payroll and
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