Acct 230 1st EditionExam # 3 Study Guide Lectures: 13-16Lecture 13 (September 23): I. Internal Controls:a. Defined as: To minimize occupational fraud, companies implement formal procedures known as internal controls. These represent a company’s plan to (1) safeguard the company’s assets and (2) improve the accuracy and reliability of accounting information.II. What are the major provisions of the Sarbanes-Oxley Act?a. Oversight board. The Public Company Accounting Oversight Board (PCAOB) has the authority to establish standards dealing with auditing, quality control, ethics, independence, and other activities relating to the preparation of audited financial reports. The board consists of five members who are appointed by the Securities and Exchange Commission. b. Corporate executive accountability. Corporate executives must personally certifythe company’s financial statements and financial disclosures. Severe financial penalties and the possibility of imprisonment are consequences of fraudulent misstatement.c. Nonaudit services. It’s unlawful for the auditors of public companies to also perform certain nonaudit services, such as consulting, for their clients. d. Retention of work papers. Auditors of public companies must retain all work papers for seven years or face a prison term for willful violation.e. Auditor rotation. The lead auditor in charge of auditing a particular company (referred to as the audit partner ) must rotate off that company within five years and allow a new audit partner to take the lead.f. Conflicts of interest. Audit firms are not allowed to audit public companies whose chief executives worked for the audit firm and participated in that company’s audit during the preceding year.g. Hiring of auditor. Audit firms are hired by the audit committee of the board of directors of the company, not by company management. h. Internal control. Section 404 of the act requires that company management document and assess the effectiveness of all internal control processes that couldaffect financial reporting and (b) that company auditors express an opinion on whether management’s assessment of the effectiveness of internal control is fairly stated.III. From an accounting perspective, what is the purpose of internal control in a company?a. Safeguard the company’s assets. b. Improve the accuracy and reliability of accounting informationc. Effective internal control builds a wall to prevent misuse of company funds by employees and fraudulent or errant financial reporting Lecture 14 (September 25): I. Know the following definitions:a. Cash: i. includes currency, coins, and balances in savings and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received from customers.b. Cash equivalents: i. short-term investments that have a maturity date no longer than three months from the date of purchase. c. Cash Controls:i. must safeguard all assets against possible misuse. Again, because cash is especially susceptible to theft, internal control of cash is a key issue.d. Cash Receipts:i. most businesses receive payment from the sale of products and services either in the form of cash or as a check received immediately or through the mail.II. What are the steps involving internal controls for cash receipts?a. Record all cash receipts ASAP – decreases theft possibilityb. Sort mail each day – note all checks/payments and names of those who paidc. Designate an employee to deposit cash and checks into the company’s bank account each day, different from the person who receives cash and checks.d. Have another employee record cash receipts in the accounting records. Verify cash receipts by comparing the bank deposit slip with the accounting records.e. Accept credit cards or debit cards, to limit the amount of cash employees handle.III. From the seller’s perspective, what is the difference between cash and credit sales?a. From the seller’s perspective, the only difference between a cash sale and a credit card sale is that the seller must pay a fee to the credit card company for allowing the customer to use a credit card.IV. What are the important steps in a cash disbursement control system?a. Make all disbursements, other than very small ones, by check, debit card, or credit card. This provides a permanent record of all disbursements.b. Authorize all expenditures before purchase and verify the accuracy of the purchase itself. The employee who authorizes payment should not also be the employee who prepares the check.c. Make sure checks are serially numbered and signed only by authorized employees. Require two signatures for larger checks.d. Periodically check amounts shown in the debit card and credit card statements against purchase receipts. The employee verifying the accuracy of the debit card and credit card statements should not also be the employee responsible for actual purchases.e. Set maximum purchase limits on debit cards and credit cards. Give approval to purchase above these amounts only to upper-level employees.f. Employees responsible for making cash disbursements should not also be in charge of cash receipts.V. What does a Bank Reconciliation do?a. A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company’s own records.b. Why would there be differences between the two records?i. Differences in these balances occur because of either timing differences or errors. 1. Timing differences in cash occur when the company records transactions either before or after the bank records the same transaction. 2. Errors can be made either by the company or its bank and may be accidental or intentional. VI. What are the steps for Bank Reconciliation?a. Step 1: Reconciling Bank’s Cash Balancei. Includes cash transactions, deposits (outstanding), and checks (outstanding) recorded by the company but not yet the bank.b. Step 2: Reconciling the Company’s Cash Balancei. Includes transactions recorded by the bank but not yet the company (i.e. interest charges, NSF checks & associated charges, company errors)c. Step 3: Adjusting the Company’s Cash Balancei. Make adjustments from both so that the two records matchLecture 15 (September 27):I. What is an account for petty cash?a. An account used by companies for minor expenses, small in nature. II. What needs to be done to establish an account for petty cash?a. Debit Petty Cash & Credit Cash for the amount you wish to