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RETL 261: Exam 3
Internal Control System
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Policies and procedures managers use to:
- Protect assets
- Ensure reliable accounting
- Promote efficient operations
- Urge adherence to company policies
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Sarbanes-Oxley Act (SOX) of 2002
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The Sarbanes-Oxley Act requires managers and auditors of public companies to document and certify the system of internal controls.
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Section 404 of SOX
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requires that managers document and
assess the effectiveness of all internal control processes that can impact financial reporting.
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Principles of Internal Control
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Establish responsibilities.
2. Maintain adequate records.
3. Insure assets and bond key employees.
4. Separate recordkeeping from custody of assets.
5. Divide responsibility for related transactions.
6. Apply technological controls.
7. Perform regular and independent reviews.
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Human fraud triangle
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Opportunity, Motivation, and Rationalization
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Control of Cash
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An effective system of internal control that
protects cash and cash equivalents should meet
three basic guidelines
1. separated
2. made by check
3. promptly deposited
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liquid assets
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Cash and similar assets that can be readily used to settle obligations
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cash
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Currency, coins, and amounts on deposit in bank accounts, checking accounts, and some savings accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders.
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Cash Equivalents
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Short-term, highly liquid investments that are:
1. Readily convertible to a known cash amount.
2. Sufficiently close to maturity date and not sensitive to
interest rate changes (US Treasuries & Money Market
funds)
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Cash Management
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1. Plan cash receipts to meet cash payments when due.
2. Keep a minimum level of cash necessary to operate.
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Cash Management Principles
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Encourage collection of receivables.
Delay payment of liabilities.
Keep only necessary levels of assets.
Plan expenditures.
Invest excess cash.
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Over-the-Counter Cash Receipts
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none of the people
involved can make a mistake or divert cash
without the difference being revealed.
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Cash Over and Short
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Sometimes errors in making change are discovered from differences between the cash in the cash register and the record of the amount of cash receipts.
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Control of Cash Disbursements
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especially important as most
large thefts occur from payment
of fictitious invoices
- Require all expenditures to be made by check.
- Limit access to checks except for those who
have the authority to sign checks.
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Voucher System of Control
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1. Verifying, approving, and recording
obligations for eventual cash disbursements.
2. Issuing checks for payment of verified,
approved, and recorded obligations.
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Petty Cash System of Control
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Small payments required in most companies
for items such as postage, courier fees,
repairs, and supplies.
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Bank Reconciliation
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A bank reconciliation is prepared periodically to explain
the difference between cash reported on the bank
statement and the cash balance on company's books.
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Receivable
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amount due from another party
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Installment Accounts Receivable
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Amounts owed by customers from credit sales for
which payment is required in periodic amounts over
an extended time period. The customer is usually
charged interest.
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bad debts
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•Direct Write-Off Method
•Allowance Method
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matching
(expense recognition)
principle
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requires
expenses to be
reported in the same
accounting period as
the sales they helped
produce.
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Allowance Method
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At the end of each
period, estimate total bad
debts expected to be
realized from that
period's sales.
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TRUE
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Proper internal control means that responsibility for a task is clearly established and assigned to one person.
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TRUE
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Technology such as cash registers, check protectors, time clocks and personal identification scanners can improve internal control.
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FALSE
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Good internal control dictates that a person who controls an asset also maintains that asset's accounting records.
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Separation of duties
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divides responsibility for a transaction or a series of related transactions between two or more individuals or departments. Separation of duties reduces the risk of error and fraud.
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The payee
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the person who signs a check, authorizing its payment.
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voucher system
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a set of procedures and approvals designed to control cash disbursements and the acceptance of obligations.
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FALSE
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If the Cash Over and Short account has a debit balance at the end of the period, the amount is reported as miscellaneous revenue.
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TRUE
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The petty cash fund should be reimbursed when it is nearing zero and at the end of the accounting period when financial statements are prepared.
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The entry necessary to establish a petty cash fund should include:
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debit petty cash
credit cash
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TRUE
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Accounts receivable occur from credit sales to customers.
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Formula for interest on a note
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principal of the note X the annual interest rate X time expressed in fraction of year.
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Formula for accts receivable turnover
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Net sales / avg accts receivable
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The aging method of determining bad debts
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is based on the knowledge that the longer a receivable is past due, the lower the likelihood of collection.
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FALSE
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Notes receivable are always classified as current liabilities.
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Promissory Note
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written promise to pay a specified
amount of money, usually with interest, either on
demand or at a definite future date.
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Plant assets
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refers to intangible assets that are used in the operations of a business.
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Revenue Expenditures
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income statement expenditures
addition costs of plant assets that do not materially increase the assets life
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Capitol Expenditures
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balance sheet expenditures
additional costs of plant assets that provide benefits exceeding the current period
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Cost determination
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purchase price plus All expenditures
needed to prepare the asset for its intended use
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Depreciation
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the process of allocating the cost of
a plant asset to expense in the accounting periods
benefiting from its use.
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Straight line depreciation
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Cost - salvage value/ useful life
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Units of production
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Cost - Salvage Value
------------------------------ = Depr. Per Unit
Units of Production
Depr. Per Unit X Units Produced in Period
#NAME?
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Declining Balance Depreciation
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Straight line rate= 100%(useful life)
DDB rate= 2(straight line rate)
Depre. exp= DDB(beginning period amount)
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