Accounting- Chapter 7

Explain how you should treat the following reconciling when reconciling the company's bank account.

1. Outstanding checks.
2. A deposit in transit.
3. The bank charged to our account a check written by another company.
4. A debit memorandum for a bank service charge.

What is fraud?

The three elements of the fraud triangle are:

Which element of the fraud triangle is the most important? (It is the most important because it is the element that the organization can control)

After numerous corporate scandals came to light in the early 2000s, Congress addressed fraud by passing the...

Under SOX, all publicly traded U.S. corporations are _____ to maintain an adequate system of ____ _____.

SOX also created the _____ to establish auditing standards and regulate auditor activity.

Internal controls are processes designed to safeguard ____, enhance the reliability of _____ _____, increase efficiency of operations, and ensure compliance with ___ and ______.

Internal Control Component:
Control Environment

Internal Control Component:
Risk Assessment

Internal Control Component:
Control Activities

Internal Control Component:
Information and Communication

Internal Control Component:
Monitoring

Fraud Triangle Factors:
Opportunity

Fraud Triangle Factors:
Financial Pressure

Fraud Triangle Factors:
Rationalization

Control activities are the backbone of the company’s efforts to address the risks it faces, such as ____

The specific control activities used by a company will vary, depending on ______ assessment of the risks faced.  This assessment is heavily influenced by the ___ and ____ of the company.

Six principles of control activities

1) Establishment of Responsibility

When is control most effective? ____

Establishing responsibility often requires limiting access only to _____ personnel, and then identifying those personnel.  Example: ______

Six principles of control activities

2) Segregation of Duties

There are two common application of this principle:
- Different individuals should be responsible for ____ activities
- The responsibility for record-keeping for an asset should be ____ from the physical custody of that asset.

Making one individual responsible for related activities ______ the potential for errors and irregularities.

Companies should assign related _____ activities, or related sales activities, to different individuals. This is because abuses are less likely to occur when companies divide the purchasing, or sales, tasks.

The accountant should have neither physical _____ of the asset nor _____ to it.

The separation of accounting responsibility from the custody of assets is especially important for ____ and _____ because these assets are very vulnerable to fraud.

Six principles of control activities

3) Documentation Procedures

Whenever possible, companies should use _____ documents, and all documents should be accounted for.

The control system should require that employees promptly forward ____ documents for accounting entries to the accounting department.

Six principles of control activities

4) Physical Controls

Physical Controls relate to the ____ _____ of assets and enhance the accuracy and reliability of the accounting records. Examples: ____

Six principles of control activities

5) Independent Internal Verification

To obtain maximum benefit from independent internal verification:
- Companies should verify records periodically or on a ____ basis.
- An employee who is _____ of the personnel responsible for the information should make the verification
- Discrepancies and _____ should be reported to a management level that can take appropriate corrective action.
Ex: ____

Who are internal auditors? ______

They also ____ the activities of departments and individuals to determine whether prescribed internal controls are being followed and recommend improvements when needed.

A growing field that has changed the aspects of internal auditing (and accounting) is ____ ____. Allows for continuous monitoring of transactions. Transactions can be flagged by dollar amount, vendor, source

Six principles of control activities

6) Human Resource Controls

- Bond employees who handle ____. What is bonding? _____
- Rotate employee's ____ and require employees to take vacations.
- Conduct through background checks.

Some Limitations of Internal Control: ______

Control Features: Use of a Bank

Contributes to good ____ _____ over cash.

Safeguards cash and _____ the amount of cash on hand

Creates a _____ record of bank transactions.

The asset account of cash maintained by the company is the "flipside" of the bank's _____ account for that company.

A bank _____ is a process of a comparing the bank's balance with the _____ balance and explaining the ______.

Many companies may use multiple bank accounts for different offices/ branches for even separate ones for _____.

Electronic Banking

Most companies take advantage of ______ banking which allows companies to access their banking on a computer or mobile device.

Strong internal controls such as strong passwords and documenting transactions is important. It is also important to _______ checks to make sure they are not stolen or misused.

Companies use electronic fund transfers to make deposits and payments frequently

Bank Statements

Bank statements are prepared from the _____ perspective.

Items shown on the bank statement include:
1. Checks paid and other ____ that reduce the balance in a depositor’s account. Examples include _____

2.  Deposits and other _____ that increase the balance in a depositor’s account. Examples include: ______

3. The accounts balance after each day's transactions

Special terms related to the bank statement:

A _____ check is a check that has been paid through the bank account. 

A check that is not paid by the bank because of insufficient funds in the bank account is called an _______ check.

If a company deposits a customer’s check and it “bounces” because of insufficient funds, it will be listed as a ____ memorandum. The depositor company will be returned the check and will reestablish an _____ for the depositor and reduce the cash in the bank account.

Reconciling a Bank Account

Reconcile balance per ____ and balance per _____ to their adjusted (corrected) ___ balances.

The need for a reconciliation has two causes:
- _____ - Which prevents one of the parties from recording the transaction in the same period.
- ____ - Can be made by either party (bank or company(books))

Common Reconciling Items:

Adjustments to the bank balance: Deposits in ____.
_____ checks.
Bank ____.

Adjustments to the bank balance: EFT collections and other ____
NSF customer checks.
Bank fees and service charges and other ____.
Company "bookkeeper" ____

Cash Types (2)

Cash equivalents are...

Restricted cash is...

Cash and cash equivalents are often comprised of coins, currency, money orders, and treasury bills
True False

Restricted cash must be classified as a noncurrent asset.
True False

A negative balance in a bank account is reported as a current liability because the company owes the amount to the bank.
True False

The sources and uses of cash during a period are reported on the balance sheet as a current asset.
True False

Reconciliation Procedures:

Per Books

Reconciliation Procedures:

Per Bank Statements

The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is

A) Outstanding check
B) Bank error
C) Deposit in transit
D) Bank service charges

Internal control is used in a business to:

A) All of the answer choices are correct
B) Enhance the accuracy and reliability of its accounting records
C) Ensure compliance with laws and regulations
D) Safeguard its assets

Which of the following was not a result of the Sarbanes-Oxley Act?

A) All publicly traded companies must maintain adequate internal controls.
B) Corporate executives are boards of directors must ensure that controls are reliable and effective, and they can be fined or imprisoned for failure to do so.
C) The Public Company Accounting Oversight Board was created to establish auditing standards and regulate auditor activity
D) Companies must file financial statements with the Internal Revenue Service (IRS)

Permitting only designated personnel such as cashiers to handle cash receipts is an application of the principle of:

A) Segregation of duties
B) Independent internal verification
C) Human resource controls
D) Establishment of responsibility

In a bank reconciliation, deposit in transit are:

A) Added to the book balance
B) Added to the bank balance
C) Deducted from the book balance
D) Deducted from the bank balance

Which statement correctly describes the reporting of cash?

A) Cash cannot be combined with cash equivalents
B) Cash is listed first in the current asset section
C) Restricted cash funds cannot be reported as a current asset
D) Restricted cash funds may be combined with cash

What are the three elements of the fraud triangle?

Which is most important to companies?

Transactions that are added to the bank balance.

Transactions that are deducted from the bank balance.

Transactions that are added to book balance:

Transactions that are deducted from book balance:

After making a bank rec, which transactions do we journalize?