Chapter 7: Internal Control and Cash

Question 1

There are six principles of internal control. They are:

Answer 1

1. Establish a Separation of Duties
2. Ensure Transactions and Activities are Authorized
3. Maintain Records
4. Insure Assets and Bond Key employees
5. Apply Technological Controls
6. Preform Internal and External Audits

Question 2

Cash

Answer 2

Consists of:
cash on hand and demand deposits,
including currency,
coins,
and amounts on deposit in bank chequing or savings accounts.

Question 3

Liquidity

Answer 3

A characteristic of an asset refers to how easily the asset can be converted into cash or another type of asset or used in paying for services or obligations.

Question 4

Why separate handling of cash from the recordkeeping of cash?

Answer 4

When duties are separated, it requires two or more people to collude for cash to be stolen and the theft to be concealed in the accounting records. (Custody and Recording)

Question 5

Why deposit cash receipts promptly in a bank?

Answer 5

Immediate deposits of cash receipts produces a timely independent test of the accuracy of the count of cash received. It also reduces cash theft or loss, and it reduces the risk of an employee personally using the money before depositing it. (Custody and Recording)

Question 6

Why make cash disbursements by cheque?

Answer 6

Paying expenses by cheque, when possible, develops a bank record of cash disbursements. This guideline also reduces the risk of cash theft. If possible it is best if two signatures are required to ensure that legitimate invoices are being paid. (Authorization and Recording)

Question 7

To replenish petty cash:

Answer 7

Cash required to replace petty cash = Fund size - Cash remaining

Question 8

To calculate cash over/(short)

Answer 8

Cash over/(short) = Total of petty cash receipts - Cash required to replenish petty cash

Question 9

Bank reconciliation

Answer 9

1. Identify the bank balance of the cash account.
2. Compare deposits listed on bank statement with deposits in the account records (cash receipts journal and previous months bank reconciliation).
3. Identify and list outstanding cheques by:
   
   • Compare cancelled cheques on the bank statement with actual cheques returned with the statement.
   • Compare cancelled cheques on the bank statement with cheques recorded in the cash disbursement
     journal.
   • Identify any outstanding cheques listed on the previous month’s bank reconciliation that are not included in
     the cancelled cheques on this month’s bank statement.
4. Calculate the adjusted bank balance.
5. Identify the company’s cash balance in the General Ledger Cash Account.
6. Inspect all additions (credits) on the bank statement and determine whether each is recorded in the books.
7. Inspect all deductions (debits) on the bank statement and determine whether each is recorded in the books.
8. Calculate the adjusted book balance.
9. Check to ensure the adjusted bank balances and the adjusted book balance are equal.
   10 Record the journal entries for items that appeared on the bank statement and have not yet been recorded in the accounting records.