Chapter 6: Cash, Fraud, and Internal Control

Vocabulary practice flashcards covering internal control systems, the Sarbanes-Oxley Act, COSO framework, fraud prevention, cash management, cash over and short, and bank reconciliations from Chapter 6.

Internal Control System

The policies and procedures used by a business to protect assets, ensure reliable accounting, uphold company policies, and promote efficient operations.

Sarbanes-Oxley Act (SOX)

Federal legislation requiring managers and auditors of public companies to document and certify internal controls; violations carry penalties of up to $25$ years in prison with fines.

Public Company Accounting Oversight Board (PCAOB)

The regulatory entity that oversees the work performed by independent auditors of public companies under the Sarbanes-Oxley Act.

Committee of Sponsoring Organizations (COSO)

An organization that defines five essential ingredients of internal control: control environment, risk assessment, control activities, information & communication, and monitoring.

Bonding

The purchase of an insurance policy by a company against theft committed by an employee who handles significant cash or assets.

Collusion

An agreement in secret between two or more employees to bypass internal controls and commit fraud.

Separation of Duties

The division of responsibilities for related transactions between two or more individuals to ensure the work of one person acts as a check on another to prevent fraud or errors.

Blockchain

A secure type of accounting ledger that continuously and simultaneously updates and verifies entries, preventing modifications without a detailed record of changes.

Cost-Benefit Constraint

An internal control limitation dictating that the costs of implementing an internal control must not exceed its expected benefits.

Ethics

Beliefs that separate right from wrong and serve as accepted standards of good and bad behavior required for accounting information to be trusted.

Fraud Triangle

A framework outlining the three factors that must exist for an individual to commit fraud: opportunity, pressure, and rationalization.

Liquid Assets

Cash and similar assets that can be readily and directly used to pay current liabilities.

Cash

An asset category comprising 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 so they are not sensitive to interest rate changes.

Cash Over and Short

An income statement account used to record differences arising between the actual cash counted in a register and the register's recorded cash receipts.

Voucher System

A set of procedures for verifying, approving, and recording liabilities for eventual cash payments, and for issuing checks to settle those approved liabilities.

Deposit Ticket

A bank document that lists currency, coins, and checks deposited into an account, serving as proof of deposit.

Check

A negotiable banking instrument used to withdraw money from a bank account, involving a maker (signor), a payee, and a payer.

Remittance Advice

A portion of or attachment to a check specifying the details of a transaction, such as dates, descriptions, gross amounts, deductions, and net amounts.

Bank Statement

A periodic document sent by a bank to a depositor detailing all monthly account activity, including deposits, withdrawals, fees, and balances.

Bank Reconciliation

A schedule prepared periodically to explain and resolve the difference between the cash balance reported on a bank statement and the cash balance on the company's books.

Deposits in Transit

Cash deposits that have been recorded in the company's accounting records but have not yet been received or recorded by the bank, requiring an addition to the bank balance.

Outstanding Checks

Checks written and recorded in the company's ledger that have not yet cleared or been paid by the bank, requiring a deduction from the bank balance.

Nonsufficient Funds (NSF) Check

A deposited customer check that is returned unpaid because the customer's account did not have enough funds, requiring a deduction from the book balance and an adjustment to accounts receivable.