Chapter 4

Question 1

Internal Control System

Answer 1

1. Consists of the policies and procedures necessary to ensure operating, reporting, and compliance objectives
2. 5 components of Internal Control
3. Control Activities: Internal Control Procedures

Question 2

Operating objectives

Answer 2

operations are effective and efficient safeguarding of assets against loss

Question 3

Reporting Objectives

Answer 3

the reliability of a company’s reporting (accounting records)

Question 4

Compliance objective

Answer 4

compliance with laws and regulations

Question 5

5 components of internal control

Answer 5

1. Control environment- company philosophy, personnel policies, overall integrity, and attitudes of everyone in the business
2. Risk Assessment- identify, analyze, and manage business risks
3. Information and Communication- gather and communicate information
4. Monitoring- tracking potential and actual problems in the internal control system
5. Control Activities- internal control procedures

Question 6

Control Activities: Internal Control Procedures

Answer 6

b. Segregation of duties- assure that no one person prepares all the documents & records for an activity

c. Adequate Documents & Records- capture all relevant information about a transaction and assist in proper recording and classification. All documents should be properly controlled

d. Safeguarding assets and Records- protect assets and accounting records from loss, theft, unauthorized use, etc.

Question 7

Cash

Answer 7

Cash on hand + Cash in Banks + Undeposited Checks
- cash appears on balance sheet & statement of cash flows

Question 8

Cash Equivalents

Answer 8

short term, highly liquid investments with an original maturity of 3 months or less

Must be BOTH:
1. readily convertible into known amount of cash
2. so near maturity that interest rate changes wont affect their market value
(original maturity of 3 months or less)

Question 9

Examples of Cash Equivalents

Answer 9

1. Treasury Bill (T- Bill)
2. Certificate Of Deposit (CD)
3. Commercial Paper
4. Money Market Fund
   (never include stock as a cash equivalent)

Question 10

Cash Management

Answer 10

necessary to ensure has neither too little nor too much cash on hand

Question 11

Tools of effective cash management include:

Answer 11

• cash controls over receipts and disbursements
• Preparations of bank reconciliations
• use of petty cash fund

Question 12

Control of Cash Receipts

Answer 12

1. record when received and safeguard
2. deposit receipts intact (deposits daily)
3. separation of duties- different employees for each of the following: recording, custody, and authorization

Question 13

Control of Cash Disbursements

Answer 13

1. All major disbursements made by check
2. pay one small, misc expenditures from petty cash
3. prepare bank reconciliation (monthly)

Question 14

Bank Reconciliation

Answer 14

reconciles timing differences and errors

Question 15

Debit Memo

Answer 15

bank reduces your cash account, deduction of the bank statement

Question 16

Credit Memo

Answer 16

bank increases your cash account, addition on the bank statement

Question 17

Cash Management Principles

Answer 17

1. Delaying payments to suppliers so a company can earn as much interest on their cash as possible
2. keep inventory low to not tie up cash
3. speed collection from customers in order to have cash to invest
4. highest return on excess cash

Question 18

To find true cash balance per bank

Answer 18

balance per bank $ xx
+ DIT (deposits in transit). xx
+ Bank errors. xx
- outstanding checks. xx
- bank errors xx
= True cash balance $ xx

Question 19

To find true cash balance per book

Answer 19

Bal. per book. $ xx
+ Notes collected. xx
+ Interest collected. xx
+ Book errors. xx
- NSF Checks ( xx )
- Service charges ( xx )
- Overdraft charges. ( xx )
- Book errors ( xx )
= True cash balance $ xx