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Flashcards in Chapter 7 powerpoint Deck (68)
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1
Q

Fraud

A

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

2
Q

Fraud triangle

A

Opportunity

Pressure

Rationalization

3
Q

Opportunity

A

Lack of sufficient controls, inadequate employee monitoring, a belief that they will not be caught

4
Q

Pressure

A

Employee has debt or a desire to lead to a lifestyle they cannot afford

5
Q

Rationalization

A

Justification by the employee as to why they commited fraud

ex. deserve more

6
Q

SOX - internal controls

A

All publicly traded corporations are required to maintian adequate internal control

Requires disclosure of material weakness

7
Q

Material Weakness

A

A significant deficiency or combination of significant deficiencies, that results in more than a remote liklihood that a material misstatement of the annual or interim financial statements will not be prevented or detected

*will we catch a deficiency

8
Q

Purpose of Internal Control

A

Safeguard Assets

Ensure Compliance with Laws and Regulations

Increase Financial Statement Reliability

Increase Operational Efficiency

9
Q

Primary Components of Internal Control System

A

Control Environment

Risk Assesment

Control Activities

Information & Communication

Monitoring

10
Q

Control Environment

A

“Tone at the top”

Management’s message to the employees that the organization values integrity and will not tolerate unethical activity

11
Q

Risk Assesment

A

Consists in two places:

  1. Identification and analysis of potential sources of risk for the company
  2. Strategic management of those risks
12
Q

Control Activities

A

Polices and procedures designed and implemented by management to address specific risks identified in the risk assesment phase

13
Q

Information and Communication

A

Internal control system should do two systems:

  1. Capture pertinent information for employees at all levels of the company
  2. Communicate this information to approriate parties
14
Q

Monitoring

A

Employees and the internal control system should be continually monitored to asses its adequacy and any significant deficiencies should be communicated to management

15
Q

6 principles of Control Activities

A

Establishment of Responsibility

Segregation of duties

Documentation procedures

Physical Controls

Idependent Internal Verification

Human Resource Controls

16
Q

Establishment of Responsibility

A

Assign responsibility to specific employees

Most effective when only one person is responsibile for a given task

17
Q

Segregation of Duties

A

Different individuals are responsibile for related activities

ex. one person orders goods, another approves, another pays

Responsibility for record-keeping of an asset should be seperate from physical control of the asset

18
Q

Documentation procedures

A

Provide evidence that transactions & events have occurred

*prenumbered documents to ensure all accounted for

* Promptly forward source documents for accounting department to ensure timely recording of transaction

19
Q
A
20
Q

Physical Controls

A

The safeguarding of assets, enhancement of accuracy and reliability of accounting records

21
Q

Independent Internal Verification

A

Review records and transactions periodically or on a surprise basis

Employee that reviews should be indepndent of personnel responsible for the information *internal auditor*

Discrepancies should be reported to management

22
Q

Human Resource Controls

A

Bonding Employees: Insurance protetion against theft by employees

Employee Rotations/required vacations: Deters employees because not able to permanently conceal theft, fraud, etc.

Background checks

23
Q

Limitations of Internal Control

A

Reasonable Assurance (Not total) - Costs should not exceed Benefits

Human element - employee fatigue or carelessness or Mistakes

  • collusion

Size of the Business: Usually a larger company will have internal auditors

24
Q

Collusion

A

Two or more individuals who work together to get around prescribed controls

25
Q

The asset most suceptible to fraudulent activities

A

CASH

26
Q

Nontimely deposit of cash receipts

A

Physical controls

27
Q

Excessive past due accounts receivable

A

Establishment of responsibility

28
Q

Disregard of advantages offered by vendors for prompt payment of invoice

A

Establishment of responsibility

29
Q

Absence of segregation of duties

A

Segregation of duties

30
Q

Inadequate procedures for applying accounting principles

A

Documentation procedures

31
Q

Lack of qualified management personel

A

Establishment of responsibility

32
Q

Lack of supervision by outside board of directors

A

Establishment of responsibility

Independent internal verification

33
Q

Overall poor record keeping

A

Documentation procedure

34
Q

Checks are not prenumberd

A

Documentation procedures

35
Q

The purchasing agent signs checks

A

Establishment of responsibility

36
Q

Unissued checks are stored in unlocked file cabinet

A

Physical controls

37
Q

Purchasing agent approves and pays for goods purchased

A

segregation of duties

38
Q

After payment, the invoice is filed

A

Documentation procedures

39
Q

The purchasing agent records payments in cash disbursements journal

A

Segregation of duties

40
Q

The treasurer records the checks in cash disbusements journal

A

segregation of duties

41
Q

The treasurer reconciles the bank statement

A

Independent internal verification

42
Q

Debit Memorandum

A

Bank service Charge

NSF (Not sufficient Funds)

43
Q

Credit Memorandum

A

Collect Notes Receivable

Interest Earned

44
Q

Deposits in Transit

A

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

45
Q

Outstanding Checks

A

Checks issued and recorded by the company that have not been paid by the bank

46
Q

NSF check

A

A check that is not paid by the bank because of insufficient funds in the customer’s bank account

47
Q

Adjusted Balance

A

Same as true cash balance, correct cash balance

48
Q

Who performs bank reconciliations?

A

Employee who is responsible for NON-cash related activities

49
Q

Reasons for bank reconciliations

A

Value as a Control

Time Lags

Errors

50
Q

Always start with outstanding items on the _________________ bank reconcilatioin

A

previous

51
Q

Neither record________________________

A

is 100% complete in all respects, neither bank nor company

52
Q

Adjustments to bank balance

A

+ Deposits in Transit

  • Outstanding Checks

+/- bank errors

53
Q

Adjustments to the book balance

A

+ notes collected by banks

  • NSF (bounced) checks
  • Check Printing or other service charges

+/- Book errors

54
Q

Electronic Funds Transfer (EFT)

A

Disbursement systems that use wire, telephone, or computers to transfer cash from one location to another

Better internal control because no cash or checks handled by employees

55
Q

Cash is:

A

Recorded in both balance sheet and statement of cash flows

Most liquid asset, so reported first on balance sheet

The balance sheet shows the amount of cash available at a given point in time

The statement of cash flows shows the sources and uses of cash during a period of time

56
Q

Cash Equivalents are:

A

Readily convertible to known amounts of cash

So near maturity that their value is relatively insensitive to interest rate changes

Examples: treasury bills, commercial paper, and money market funds

57
Q

Restricted Cash

A

Cash that is not available for general use

Set aside for special purpose

Reported spereately on balance sheet

IF not to be used within next year, report as noncurrent asset on the balance sheet

58
Q

Objective of Managing Cash

A

Ensure that the company has sufficient cash to meet payments, yet

Minimize the amount of idle cash on hand

59
Q

Basic Principles of Cash Management

A

Increase the Speed of Receivables Collection

Keep Inventory Levels Low

monitor Payment of Liabilities

Plan Timing of Major Expenditures

Invest Idle Cash

60
Q

Increase Speed of Receivables collection

A

Offer 2/10 discount instead of only N/30

61
Q

Keep inventory levels low

A

Remember just-in-time inventory

62
Q

Monitor payment of liabilities

A

Pay at the end of allowed period (without being late)

63
Q

Invest idle cash

A

Liquid investment: Someone always willing to buy or sell the investment

Risk-free investment: No concern that the party will default on its promise to pay the principal and interest

64
Q

Cash Budget

A

Cash is vital

Planning the company’s cash needs is a key business activity

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

Contributes to more effective cash management

65
Q

Where we classify restricted cash impacts:

A

Liquidity analysis:

Working capital

Current ratio

66
Q

Prpoer completion of the bank reconciliation affects

A

liquidity analysis

solvency analysis

67
Q

Internal Controls effect

A

Affects: Auditor’s report, thus shares prices

Profitability and Productivity

Market as a whole - if a graud were to occur due to a lack of internal controls it could cause a ripple effect in the stock market

68
Q
A