Cash, Fraud, and Internal Control

Flashcards for vocabulary review of cash, fraud, and internal control concepts.

Internal Control System

A system used to monitor and control business activities, including policies and procedures to protect assets, ensure reliable accounting, uphold company policies, and promote efficient operations.

Sarbanes-Oxley Act (SOX)

Requires managers and auditors of public companies to document and certify the system of internal controls, with harsh penalties for violations.

Committee of Sponsoring Organizations (COSO)

Lists five ingredients of internal control which add quality to accounting information: Control environment, Risk assessment, Control activities, Information & communication, Monitoring.

Establish Responsibilities

An internal control principle where tasks should be clearly established and assigned to one person to determine who is at fault if errors occur.

Maintain Adequate Records

An internal control principle that protects assets and helps managers monitor company activities through detailed records, chart of accounts, preprinted forms, prenumbered sales slips, and computerized point-of-sale systems.

Insure Assets and Bond Key Employees

An internal control principle where assets are insured against losses, and employees handling significant cash or assets are bonded through an insurance policy against theft.

Separate Recordkeeping from Custody of Assets

An internal control principle ensuring that the person who controls or has access to assets does not have access to the asset’s accounting records, reducing the risk of theft or waste.

Divide Responsibility for Related Transactions

An internal control principle where responsibility for a transaction is divided between two or more individuals, ensuring the work of one person acts as a check on the other to prevent fraud or errors; also known as separation of duties.

Apply Technological Controls

Using technology such as cash registers, time clocks, and ID scanners to improve internal control.

Perform Regular and Independent Reviews

Having auditors not directly involved in activities evaluate the efficiency and effectiveness of internal controls to ensure procedures are followed.

Blockchain

A more secure type of accounting ledger which continuously and simultaneously updates and verifies to prevent modification without a detailed record of changes. Changes cannot be destroyed or hidden.

Limitations of Internal Control

Include human error, human fraud (opportunity, pressure & rationalization) and the cost-benefit constraint.

Control of Cash

An effective system of internal control for cash should ensure handling cash is separate from recordkeeping, payments are made by check or EFT, and receipts are promptly deposited.

Cash

Includes currency, coins, deposits in bank accounts, customer checks, cashier checks, certified checks, and money orders.

Cash Equivalents

Short-term, highly liquid investments that are readily convertible to a known cash amount and close to maturity date.

Cash Management

Involves planning cash receipts to meet payments, maintaining a minimum cash level, encouraging collection of receivables, delaying payment of liabilities, keeping only necessary assets, planning expenditures, and investing excess cash.

Cash Over and Short

An account used to record errors in making change, representing differences between the cash in the register and the record of cash receipts.

Voucher System of Control

Establishes procedures for verifying, approving, and recording liabilities for eventual cash payments, and issuing checks for payment of verified liabilities.

Petty Cash System of Control

Used for small payments such as shipping fees, minor repairs, and low-cost supplies.

Reimbursement of Petty Cash Fund

Petty cash payments + cash left in account should total to the fund balance. Debit each of the expenses, Merchandise Inventory and credit Cash.

Basic Bank Services

Include bank accounts, signature cards, deposit tickets, checks, electronic funds transfer (EFT), and bank statements.

Bank Reconciliation

A schedule explaining any differences between the bank's and the company's records of cash.

Days’ Sales Uncollected

An estimate of how long it should take to collect accounts receivable. Calculated as (Accounts receivable / Net sales) x 365.

Invoice Approval

Also called check authorization, it is a checklist of steps necessary for approving invoice and payment.

Voucher

Complete after invoice has been checked and approved. Used to authorize recording obligation.