Ch.7 - Internal Control Cash Flashcards
(29 cards)
What is internal control and the two types of it?
It is a system that is designed to help an organization achieve:
a) Reliable financial reporting
b) Effective and efficient operations
c) Compliance with relevant laws and regulations
The two types are Preventive and Detective (self explanatory).
What are the 5 Primary Components of Good Internal Control Systems? (Just list them out)
- Control Environment
- Risk Assessment
- Control Activities
- Information and Communication
- Monitoring Activities
What is a Control Environment?
Is it an indication that management values integrity and unethical activity is not tolerated.
What is Risk Assessment?
It is an identification and analysis of business risk factors and mitigation strategies to reduce the likelihood and impact of occurence.
What are Control Activities? (Just the brief explanation of the component)
They are policies and procedures that address specific risks.
What are information and communication?
Internal control system must be able to capture and communicate all pertinent information to the appropriate internal and external users.
What are monitoring activities?
The internal control systems must be monitored periodically for adequacy.
What are the 5 Control Activities? (list them out)
- Assignment of Responsibility
- Segregation of Duties
- Documentation
- Physical Controls
- Review and Reconciliation
What is the assignment of responsibility?
Responsibilities are assigned to specific employees to keep them accountable for completing the task properly.
Examples: cashiers are responsible for their own cash register, only managers are permitted to approve discounts or authorize refunds.
What are segregation of duties?
The responsibilities for authorizing transactions, recording transactions, and asset custody are assigned to different individuals.
What is documentation?
Is it evidence that transactions have occurred at specific times and amounts.
Documentations (invoices and cheques) should be subsequentially pre-numbered as it mitigates against recording a transaction more than once or none at all.
Original documents (source documents) should be used for recording transactions (and then photocopy it just to reduce risk of duplication entries and payments).
What are physical controls?
It is used to safeguard assets and enhance the accuracy and reliability of account records.
What is review and reconciliation?
Controls should be independently reviewed, both internally and externally.
Reconciliation: it is the comparison between two or more documents.
Internal Review is conducted by employees and managers.
External Review is conducted by non-employees.
What are the limitations of internal control?
- Cost/benefit considerations (cost constraint)
- Human error
- Collusion
- Management override
What is fraud and the fraud triangle?
Fraud is an internal action to misappropriate (steal) assets or misstate financial position.
The triangle consists of:
Opportunity, Pressure, Rationalization
What are Cash Receipts Controls?
Over-the-Counter Receipts: its control is more effective when cash receipts are deposited into account on a daily basis.
Electronic Receipts: increasing electronic funds (EFT) is an effective control
Cheque Receipts: they’re still commonly used in B2B transactions.
What is cash payments?
It controls over cash more effective payments are made by cheque of EFT.
Effective cheque controls include dual signature and review of supporting documentation.
What is bank reconciliation?
It reconciles cash balance as per bank account statement with the cash balance as per books.
Both bank statement balance reconciled to adjusted cash balance.
Reconciling Items as Per Bank Statement Formulas
End deposits in transit = beginning deposits in transit + deposits recorded in books during period - deposits recorded on bank statement during period
End outstanding cheques = beginning outstanding cheques + cheques recorded on books during period - cheques recorded on bank statement during period
Reconciled Cash Balance= cash balance as per bank statement + deposits in transit - outstanding cheques +/- error
Reconciling items as per books formula
Cash balance as per books + EFT collections + interest earned + other deposits - EFT payments - service charges - interest charges - other payments +/- error = reconciled cash balance
What is cash and cash equivalents (CCE) ? (reporting cash)
Cash Equivalents: they are short-term highly liquid held-for-trading investments subject to insignificant risk of changes in value
–> They are held to meet short-term cash needs instead of held for investment purposes
Overdraft: they are pre-approved amounts for cheque amounts greater than cash balance; operating line of credit or credit facility.
Bank Indebtedness: it’s a cash deficit or overdraft position at year end; current liability (a loan)
Cash Equivalents Formula
Cash Equivalents = Liquid assets with insignificant risk convertible into a known amount of cash - bank overdraft
What are the basic principles of cash management? (list them)
- Increase speed of receivables collections
- Keeps inventory levels low
- Takes advantage of credit periods
- Plan timing of major expenditures
- Invest idle cash
- Prepare cash budgest
