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Flashcards in Chapter 7 Deck (67):
1

Three fraud characteristics

Opportunity

Financial pressure

Rationalization

2

fraud

a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer

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Internal control

All the related methods and measures to safeguard assets, enhance reliability of its accounting records, increase efficiency of operationjs, and ensure compliance with laws and regulations

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5 primary components of internal controls

A control environment

risk assesment

control activities

information and communication

monitoring

5

Control environment

It is the responsibility of top management to make it clear that the organization values integrity and unethical activity will not be tolerated

"tone at the top"

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risk assesment

Companies must identify and analyze the various factors that create risk for the business and must determine how to manage these risks

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control activities

to reduce fraud, management must design policies and procedures to address the specific risks faced by the company

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Information and communication

The internal control system must capture and communicate all perttienent info both down and up the organization, as well as communicate info to appropriate external parties

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monitoring

internal control systems must be monitored periodically for their adequacy

defiencies reported to top management or board of directors

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Six principles of control activities

Establishment of responsibility

Segregation of duties

Documentation procedures

Physical controls

Independent internal verification

Human resource controls

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Control is most effective when ___________________________________

Only one person is responsible for a given task

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The work of one employee should _____________________________

provide a reliable basis for evaluating the work of another employee

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Making one individual responsible for related activities increases ___________________________ 

the potential for errors and irregularities

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The custodian of the asset is not likely to convert the asset to personal use when ________________________________________

one employee maintains the record of the asset, and a different employee has physical custody of the asset

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Segregation of duties (accountability for assets)

Accounting employee A - maintains cash balances per books

Assistant cashier B - maintains custody of cash on hand

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Prenumbered documents

Companies should use prenumbered documents, and all documents should be accounted for

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Forwarding source documents

Employees should promptly forwards source documents for accounting entries to the accounting department

*Helps ensure timely recording of the transaction*

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Physical controls

Relate to the safeguarding of assets and enhance the accuracy and reliability of the accounting records

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independent internal verification

Involves the review of data prepared by employees

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internal auditors

Company employees who continuously evaluate the effectiveness of the company's internal control systems

recommend improvements when needed

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Human resource control activities

Bond employees who handle cash

rotate employees' duties and require employees to take vacations

conduct thorough background checks

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bonding

involves obtaining insurance protection against theft by employees

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Controls may _______________________

vary with the risk level of the activity

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reasonable assurance

Companies generally design their systems of internal control to provide reasonable assurance of proper safeguarding of assets and reliabliyt of the accounting records

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human element

factor in every system of internal controls

*employee fatigue, carelessness, or indifference

 

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Collusion

When two or more individuals work together to get around prescribed controls

can reduce the effectiveness of a system, eliminating the protection offered by segregation of duties

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Cash (internal controls)

Cash is the asset most susceptible to fraudulent activities

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Internal control over cash disbusrsments

is more effective when companies pay by check, rather than by cash

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Voucher system

a network of approvals by authorized individuals, acting independently, to ensure that all disbursements by check are proper

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Voucher

An authorization form prepared for each expenditure in a voucher system

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voucher register

where vouchers are recorded

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check register

the paid voucher is sent to the accounting department for recording in the check register

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Ethics note: petty cash fund strengthend by:

1. having a supervisor make surprise counts of the fund to confirm whether the paid petty cash receipts and fund cash equal the fund amount

2. canceling or mutilating the paid petty cash receipts so they cannot be resubmitted for reimbursement

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__________________ contributes significantly to good internal control over cash

The use of a bank

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Bank reconciliation

The process of comparing the bank's balance with the company's balance, and explaining the differences to make them agree

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canceled check

a paid check (alternative word)

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Bank statement essentialy

is a copy of the bank's records sent to the customer for periodic view

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NSF (not sufficient funds) check

A check that is not paid by a bank because of insufficient funds in a bank account

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bank statement

a statement received monthly from the bank that shows the depositor's bank transactions and balances

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Reconciling the bank account

Making the balance per books and the balance per bank agree with the true amount

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Two causes of reconciling the bank account

Time lags

Errors

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Time lags

Prevent one of the parties from recording the transaction in the same period

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Errors

Occur by either party in recording transactions

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Who prepares the reconciliation

To obtain maximum benefit from a bank reconciliation, an employee who has no other responsibilities related to cash should prepare the reconciliation

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Depoisits in transit and outstanding checks

are reconciling items because of time lags

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Deposits in transit

Deposits recorded by the depositor that have not been recorded by the bank

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Outstanding checks

Issued checks recorded by the company that have not been paid by the bank

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Alternative terminology for adjusted cash balance

correct cash balance

true cash balance

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Electronic fund transfers (EFTs)

Disbursement systems that use wire, telephone, or computer to transfer cash from one locatioin to another

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Cash

coins

currency (paper money)

checks

money orders

money on hand or on deposit in a bank

*NOT INCLUDED post-date checks

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Cash equivalents

Short-term, highly liquid investments that are both:

1. readily convertible to known amounts of cash

2. So near their maturity that their market value is relatively insensitive to changes in interest rates

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Examples of cash equivalents

Treasury bills

commercial paper (short-term corporate notes)

money market funds

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Ethics note: cash equivalents

Companies can make themselves look more liquid by reporting many items as cash equivalent

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restricted cash

cash that is not available for general use but rather is restricted for a special purpose

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Treasurer

Management of cash is the responsibiliyt of the company treasurer

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liquid investment

One with a market in which someone is always willing to buy or sell the investment

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risk-free investment

There is no concern that the party will default on its promise to pay its principal and interest

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five basic principles of cash management

Increase the speed of receivables collection

Keep inventory levels low

Monitor payment of liabilities

Plan the timing of major expenditures

Invest idel cash

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International note: cash management

Corporate treasurers make investments known as hedges to lock in an exchange rate to reduce the company's exposure to exchange-rate fluctuation

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Cash budget

Shows anticipated cash flows, usually over a one- to two-year period

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____________ contributes to more effective cash management

A cash budget

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Cash receipts section

includes: expected receipts from the company's principal sources of cash

anticipated receipts of interest and dividends

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Operation of a petty cash fund

1. establishing the fund

2.  making mapyments from the fund

3. replenishing the fund

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2 steps in establishing a petty cash fund

1. appointng a petty cash custodian who will be responsible for the fund

2. determing the size of the fund

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"Slush" funds

are unauthorized and hidden (under the table)

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Receipt satisfies two principles:

1. establishing responsibility (signature of custodian)

2. documentation procedures

67