7 - Internal Control & Cash

Question 1

Good internal control systems have the following five primary components:

CRCIM

Answer 1

• Control Environment (“setting the tone at the top”)
• Risk Assessment
• Control Activities (policies/procedures)
• Information & Communication
• Monitoring Activities

Question 2

5 Popular Control Activities that apply to most companies

Answer 2

1. Assignment of responsibility 2. Segregation of duties
2. Documentation
3. Physical controls
4. Review and reconciliation

Question 3

Assignment of Responsibility enables responsibility to be assigned to specific employees, making them __________ for carrying it out appropriately.

Answer 3

Assignment of Responsibility enables responsibility to be assigned to specific employees, making them accountable for carrying it out appropriately.

Question 4

Segregation of duties involves the ______ of _____ that should be spread across _______ employees.

Answer 4

Segregation of duties involves the types of duties that should be spread across multiple employees.

Question 5

Segregation of duties involves the company ensuring that no single employee has the ability to ______, _______, and take ______ of an asset.

Answer 5

Segregation of duties involves the company ensuring that no single employee has the ability to authorize, record, and take custody of an asset.

Question 6

Documents provide evidence that ________ and _______ have occurred at specified ______ and at specified _______.

Answer 6

Documents provide evidence that transactions and events have occurred at specified times and at specified amounts.

Question 7

Documentation (such as invoices and cheques) should be ________ prenumbered.

Answer 7

Documentation (such as invoices and cheques) should be sequentially prenumbered. To prevent a transaction from being recorded more than once.

Question 8

Insuring assets is another form of ______ them—in this case, from risks related to theft or damage from fire or floods.

Answer 8

Insuring assets is another form of safeguarding them—in this case, from risks related to theft or damage from fire or floods. Safeguarding is also physical (ex. locks, time clocks to prevent payroll fraud).

Question 9

Reconciliations are a key part of this control activity and involve ________ between two or more documents, like comparing the receiving report with the sales invoices.

Answer 9

Reconciliations are a key part of this control activity and involve comparisons between two or more documents, like comparing the receiving report with the sales invoices.

Question 10

Internal reviews, which are conducted by _______ or _______, are especially useful in comparing accounting records with existing assets to ensure that nothing has been stolen.

Answer 10

Internal reviews, which are conducted by employees or managers, are especially useful in comparing accounting records with existing assets to ensure that nothing has been stolen.

Question 11

For internal reviews to be beneficial, three measures are recommended:

RID

Answer 11

1. The review should be performed regularly, with occasional reviews conducted on a surprise basis.
2. The employee performing the review should be independent of the personnel responsible for the information.
3. Discrepancies and exceptions should be reported to a management-level employee who can take appropriate corrective action.

Question 12

If a company is a public company, a management report addressed to shareholders is included in the ______ report that explains that management is responsible for the system of internal controls.

Answer 12

If a company is a public company (it lists its shares on a public stock exchange), a management report addressed to shareholders is included in the annual report that explains that management is responsible for the system of internal controls.

Question 13

It is useful to contrast internal reviews with ______ reviews.

Answer 13

It is useful to contrast internal reviews with external reviews.

Question 14

External auditors plan and perform an audit to obtain ________ _______ that the financial statements do not have any material _________.

Answer 14

External auditors plan and perform an audit to obtain reasonable assurance that the financial statements do not have any material misstatements.

Question 15

A company’s system of internal control can only provide ___________ ________ (rather than a guarantee) that assets are properly safeguarded and that the accounting records are accurate and reliable.

Answer 15

A company’s system of internal control can only provide reasonable assurance (rather than a guarantee) that assets are properly safeguarded and that the accounting records are accurate and reliable.

Question 16

Limitations of Internal Controls Include:

C/B H C M

Answer 16

1. Cost/benefit considerations
2. Human error
3. Collusion
4. Management override

Question 17

Cost/benefit considerations is the limitation that the costs of establishing control activities should not ______ the benefits that are expected to result from their use.

Answer 17

Cost/benefit considerations is the limitation that the costs of establishing control activities should not exceed the benefits that are expected to result from their use.

Question 18

Human Error could be a result of lack of ______, employee ______, _________, or __________.

Answer 18

Human Error could be a result of lack of training, employee fatigue, carelessness, or indifference.

Question 19

Collusion describes a situation where two or more individuals work together to _____ ______ prescribed control activities.

Answer 19

Collusion describes a situation where two or more individuals work together to get around prescribed control activities.

Question 20

Cash receipts come by way of a variety of methods:

Answer 20

1. Over-the-counter receipts
2. Electronic receipts
3. Cheque receipts (cheques received either at the time of sale or at a later date by mail)

Question 21

Generally, internal control over cash receipts is more effective when cash receipts are deposited _______ into the bank account on a _______ basis.

Answer 21

Generally, internal control over cash receipts is more effective when cash receipts are deposited intact into the bank account on a daily basis.

Increasing the amount of cash received by electronic funds transfer is also an effective control.

Question 22

Electronic funds transfer (EFT) is a way of transferring money ________ from one bank account to another.

Answer 22

Electronic funds transfer (EFT) is a way of transferring money electronically from one bank account to another.

Ex. debit, credit card transactions

Question 23

Electronic funds transfers normally result in better internal control because company employees are not required to ______ ______ (or cheques).

Answer 23

Electronic funds transfers normally result in better internal control because company employees are not required to handle cash (or cheques).

Question 24

When a cheque is received in the mail, it is usually accompanied by a _________ _______, which is the detachable part of the sales invoice that customers are asked to send back with their cheque.

Answer 24

When a cheque is received in the mail, it is usually accompanied by a remittance advice, which is the detachable part of the sales invoice that customers are asked to send back with their cheque.

Question 25

Good control for cheques includes having them signed by at least _____ authorized employees.

Answer 25

Good control for cheques includes having them signed by at least two authorized employees.

Question 26

There should be a clear segregation of duties between the cheque signing, which is an _________ function, and the accounts payable function, which is a _______ function.

Answer 26

There should be a clear segregation of duties between the cheque signing, which is an authorization function, and the accounts payable function, which is a recording function.

Question 27

Cheques should be ________ (documentation) and all cheque numbers must be accounted for in the payment and recording process (review and reconciliation).

Answer 27

Cheques should be prenumbered (documentation) and all cheque numbers must be accounted for in the payment and recording process (review and reconciliation).

Question 28

Cheques should never be _______ and there should be restricted access to _______ cheques and cheque-signing machines should be safeguarded (physical controls).

Answer 28

Cheques should never be pre-signed (assignment of responsibility) and there should be restricted access to blank cheques and cheque-signing machines should be safeguarded (physical controls).

Question 29

The use of a bank contributes significantly to good _______ _______ over cash.

Answer 29

The use of a bank contributes significantly to good internal control over cash.

Question 30

What to the bank is a credit is to the company a ______, and vice versa. This is because, to the bank, your account is a _______. When you deposit funds, the bank’s liability ________; hence it _______ the account. When you withdraw funds, the bank’s liability is ________; hence it _______ the account.

Answer 30

What to the bank is a credit is to the company a debit, and vice versa. This is because, to the bank, your account is a liability. When you deposit funds, the bank’s liability increases; hence it credits the account. When you withdraw funds, the bank’s liability is reduced; hence it debits the account.

Question 31

Deposits to a company’s bank account can be made at the bank by authorized employees, which are documented by receipt of a _____ _____.

Answer 31

Deposits to a company’s bank account can be made at the bank by authorized employees, which are documented by receipt of a deposit slip.

Question 32

There are two reasons that the bank and company records differ:

T E

Answer 32

1. Timing differences that result in one of the parties recording the transaction in a different period (month) than the other and
2. Errors made by either party in recording transactions

Question 33

Deposits recorded by the ______ that have not yet been recorded by the ______ are called deposits in transit.

Answer 33

Deposits recorded by the company that have not yet been recorded by the bank are called deposits in transit.

Question 34

Reconciliations should be prepared by an employee who has no other responsibilities related to _______ (segregation of duties).

Answer 34

Reconciliations should be prepared by an employee who has no other responsibilities related to cash (segregation of duties).

Question 35

Theft of cash by employees, which is also known as ________.

Answer 35

Theft of cash by employees, which is also known as embezzlement.

Question 36

In reconciling the bank account, the balance per the ______ statement is reconciled with the balance per the ________’s books.

Answer 36

In reconciling the bank account, the balance per the bank statement is reconciled with the balance per the company’s books.

Question 37

The ending cash amount reported on the statement of _____ _____ agrees with the cash amount reported on the statement of ____ ______.

Answer 37

The ending cash amount reported on the statement of cash flows agrees with the cash amount reported on the statement of financial position.

Question 38

Cash equivalents are ____-term, highly ______ (easily sold) held-for-trading investments that are subject to an _______ risk of changes in value.

Answer 38

Cash equivalents are short-term, highly liquid (easily sold) held-for-trading investments that are subject to an insignificant risk of changes in value.

Examples of cash equivalents include debt investments such as government treasury bills (T-bills) that mature in 90 days or less, money market funds, and 90-day bank term deposits.

Question 39

Bank overdrafts occur when the bank has __________ the company to be able to ______ cheques for amounts _______ than the cash balance in the company’s bank account.

Answer 39

Bank overdrafts occur when the bank has pre-approved the company to be able to write cheques for amounts greater than the cash balance in the company’s bank account.

Question 40

Pre-approved amounts are referred to as lines of ______ or _____ facilities.

Answer 40

Pre-approved amounts are referred to as lines of credit or credit facilities.

Question 41

When a line of credit has been accessed, the cash account will show a ______ balance in the general ledger that is reported as a current ______ called bank indebtedness.

Answer 41

When a line of credit has been accessed, the cash account (which is net of the line of credit) will show a credit balance in the general ledger that is reported as a current liability called bank indebtedness.

Question 42

Bank overdrafts are deducted from _____ and _____ ________.

Answer 42

Bank overdrafts are deducted from cash and cash equivalents.

Question 43

Cash that has a restricted use should be reported separately on the statement of _______ position as ______ _______.

Answer 43

Cash that has a restricted use should be reported separately on the statement of financial position as restricted cash.

Question 44

Banks can require borrowers to maintain ________ cash balances when making loans to customers.

These _________ balances, called a _________ balances, provide the bank with ________ for the loans in the event the borrower ____ to make a payment.

Answer 44

Banks can require borrowers to maintain minimum cash balances when making loans to customers.

These minimum balances, called a compensating balances, provide the bank with support for the loans in the event the borrower fails to make a payment.

Question 45

The following basic principles of cash management help ensure that companies will have a sufficient amount of cash:

SIDEIC

Answer 45

1. Increase the speed of collection on receivables.
2. Keep inventory levels low.
3. Delay payment of liabilities.
4. Plan the timing of major expenditures.
5. Invest idle cash.
6. Prepare a cash budget.