ACC exam 2

procedures for maintaining separation of duties

control activities

routine activities that are meant to continually observe internal control activities

monitoring

transfer of data from lower managers to top executives for accurate financial report

information and communication

formal policies to evaluate internal and external threats to achieving company objectives

risk assesment

overall attitude of the company with respect to internal controls

control environment

company should maintain security over assets and accounting records

physical controls

management should periodically determine whether the amounts of physical assets of the company match the accounting records

reconciliations

the company should provide employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties

employee management

actual performance of individuals or processes should be checked against their expected performance.

performance review

authorization transactions recording transactions and maintaining control of the related assets should be separated among employees.

separation of duties

to prevent improper use of the company’s resources, only certain employees are allowed to carry out certain business activities.

proper authorization

for most large companies, occupational fraud is minimal and internal control procedures unnecessary

false (occupational fraud is large, and internal procedure controls are necessary)

Managers have a variety of reasons for manipulating the numbers in financial statements, such as maximizing their compensation, increasing the company's stock price, and preserving their jobs.

true

Internal control procedures include formal policies and procedures related to (1) safeguarding the company’s assets and (2) improving the accuracy and reliability of accounting information.

true

"Cooking the books" is a phrase used by accountants to indicate the preparation of financial statements that are free of manipulation.

false it means manipulation of financial reocrds

Most occupational fraud cases involve misuse of the company's resources.

true

Common types of financial statement fraud include creating fictitious revenues from a fake customer, improperly valuing assets, hiding liabilities, and mismatching revenues and expenses.

true

The components of internal control are built on the foundation of the ethical tone set by top management

true

Once every three months, managers need to review operations to ensure that control procedures work effectively.

false (regular ongoing monitoring)

Collusion refers to the act of a single individual circumventing internal control procedures.

false (2 or more people)

Detective control procedures are designed to detect errors or fraud that have already occurred, while preventive control procedures are designed to keep errors or fraud from occurring in the first place.

true

fraud committed by top-level employees is more difficult to detect because those employees more often have the ability to override internal control features.

true

A good example of separation of duties would be having one person collect cash from customers and account for it, while having another person order inventory and maintain control over it.

false

Employee tips historically have been the most common means of detecting employee fraud.

true

Detective controls include reconciling the physical assets of the company with the accounting records and comparing actual performance of individuals or processes against their expected performance.

true

Effective internal controls and ethical employees ensure a company's success.

false

what control activity is violated: A manufacturing company compares total sales in the current year to those in the previous year but does not compare the cost of production.

performance review

what control activity is violated:So that employees can have easy access to office supplies, a company keeps supplies in unlocked cabinets in multiple locations.

physical control

what control activity is violated:At the end of each day, a single employee collects all cash received from customers, records the total, and makes the deposit at the bank.

seperation of duties

what control activity is violated: At the end of the year only, the company compares its cash records to the bank’s records of cash deposited and withdrawn during the year.

reconciliations

what control activity is violated: A company encourages employees to call an anonymous hotline if they believe other employees are circumventing internal control features.

none

what control activity is violated: All employees have the authority to refund a customer’s money.

proper authorization

the more liquid an asset is:

the easier to convert it into cash

current assets are listed in order of liquidity from most to least. what is the order:

cash, receivables, inventory, supplies, prepaid

what does a classified balance sheet do to assets and liabiilties

it cuts them into current and long-term categories

what does collusion do

collusion weakens internal controls because 2 employees are able to cover up eachothers fraud

the Sarbane-Oxley Act requires publicly traded US corps to do what

maintain adequate internal control system

the average time it takes for a merchandiser to purchase inventory and eventually collect cash from the inventory’s sale is referred to as the:

operating cycle

current assets are expected to be converted into cash or used up within one year of the operating cycle, whichever is:

longer

subcategories of long-term assets

PPE, intangible assets, long-term investments, other assets

PPE characteristics

human made, exist in nature, should be used in company’s operations to generate revenues.

essential characteristics of an asset

transaction or event giving rise to the asset must have already occurred, the company must be able to control the asset, or control others access to it. the asset must provide probable future economic benefits in the form of direct or indirect future cash flows.

what is true about assets

they DO NOT have to be monetary (ex: equipment)

liability accounts that are satisfied with a future cash payment

accounts payable, notes payable, salaries payable, interest payable.

example of earned capital account

retained earnings (earned capital account = profits kept in the business)

gross profit equations

GP = Sales Revenue - Cost of Goods Sold

other incomes/ losses in non-operating section of the multi-step income statement

interest revenue, interest expense, gains and losses, dividend revenue

examples of internal controls

bonding employees who handle cash, use prenumbered documents, segregation of recordkeeping duties related to assets form their physical custody

what does having one person responsible for related activities of ordering receiving and paying for inventory.

it increases the potential for errors and fraud

what are employees who evaluate the internal control system of the company which employs them

internal audits

3 elements of fraud triangle and which element does a company’s management have the most control over.

opportunity, financial pressure, rationalization. management has most power over opportunity because internal controls can limit access, require approvals, and sperate duties.

what are the primary goals of an internal control system

to safeguard assets, ensure accuracy and reliability of accounting info, encourage efficient operations, ensure compliance with laws and regulations.

5 primary components of internal control

control environment, risk assessment, control activities, info and communications, monitoring

define current asset

must be used up, sold, or turned into money within a year

define long-term asset

benefits beyond 1 year

define current liability

must be paid within the year

define long-term liability

must be paid beyond a year

cash equivalent defined

short term investment that has a maturity date no longer than 3 months form date of purchase

what represents good controls over cash disbursements

authorizing all expenditures before purchase and verifying the accuracy of the purchase, make all disbursements (other than small ones) by check debit card or credit card. the employee who authorizes payment should not also be the employee who prepares the check.

checks outstanding defined

checks the company has written that have not yet been recorded by the bank

a deposit outstanding will cause the banks cash balance to be higher because

the company has recorded the deposit, but the bank has yet to do so

what asset is most susceptible to theft

cash

after prepping the bank reconciliation, an NSF check from a customer would result in what when recording the adjustment to the company’s cash balance.

debit to accounts receivable

the account “allowance for uncollectible accounts” is classified as a

contra asset to accounts receivable in the balance sheet.

what does a debit beginning balance in the AFUA before adjustment indicate

that more bad debts were written off in the current year than were estimated

net accounts receivable defined

the amount of cash that is actually expected to be collected on accounts receivable

deposits outstanding defined

cash receipts received by the company but not yet recorded by the bank

bank service fees defined

fees imposed by the bank to the company for providing routine services

NSF checks from customers

checks written to the company that are returned by the bank as not having adequate funds

checks outstanding defined

checks written by the company but not yet recorded by the bank

note collected defined

amount collected by the bank on behalf of the company in a lending arrangement

company error

the company recorded a deposit twice

formula for amount of cash that should be reported on balance sheet (adjusted bank balance)

only items that affect the bank side or reconciliation: Bank Balance + deposits outstanding - checks outstanding

bad debt = bad news (what is bad debt and bed news)

bad debt can be uncollectible accounts which is an expense. that means both assets and stockholders’ equity will decrease

what methods are allowed under GAAP for the purpose of accounting uncollectible accounts

percentage-receivables method, aging method, allowance method

percentage-receivables method defined

looking at ending AR and estimating what % you won’t collect

aging method defined

detailed version of POR method. it breaks AR into buckets based on how old the debit is. (the longer someone owes me the less likely they will pay)

allowance method defined

GAAP approved. this is the big category that the other 2 fall into. records bad debt expense + create/adjust allowance for uncollectible accounts

the amount of a company’s receivables is influenced by several variables like

credit and collection policies, nature of goods or service sold, level of credit sales

physical controls defined

the company should maintain security over assets and accounting records

reconciliations defined

management should periodically determine whether the amounts of physicals assets of the company match the accounting records

employee management

the company should provide employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties

performance reviews

the actual performance of individuals or processes should be checked against their expected performance.

seperation of duties

authorizing transactions recording transactions and maintaining control of related assets should be separated amount employees

proper authorization

to prevent improper use of the company’s resources, only certain employees are allowed to carry out certain business activities.

a higher receivables turnover ratio generally indicates what

more effective management of accounts receivable

what does a receivables turnover ratio measure

a company’s ability to collect cash from customers

receivables turnover ratio formula

(total sales)(% of credit sales)/(average AR)

what does GAAP define a cash equivalent as

a highly liquid investment that has a maturity date no longer than 3 months from the original purchase date

what is an effective cash receipts control procedure

cash being handled only by authorized personnel, a source document should be generated for all cash receipts, cash should be stored securely with limited authorized access.

how often should a company prepare a bank reconciliation

once a month

if checks totaling $50,000 were written in November but only $42,000 cleared the bank, what is the amount of outstanding checks

8,000.

the allowance for doubtful accounts is an example of

a contra-asset account

the ‘allowance method’ of accounting for bad debts applied GAAP, does ‘direct write'-off method?

nope

what decreases gross margin

(gross margin = net sales - COGS) so an increase in COGS decreases gross margin

costs of good available for sale is determined with which formula

beginning inventory + net purchases

COGS is determined with which formula

beginning inventory + net purchases - ending inventory

companies may choose an inventory costing method for financial reporting purposes that is different from what

how their actual inventory flows

what does the LIFO conformity rule state

if the LIFO method is used for income tax purposes, the LIFO method must be used for financial statement purposes

what does the perpetual system record

all increases and decreases to inventory’s cost directly in the ‘inventory’ account and records the cost of goods sold at the time of the inventory ‘s sale