Exam 2 Chapter 6 Accounting (Cash, Fraud, and Internal Control)

Internal control system

Used to monitor and control business activities. Includes policies and procedures used to protect assets, ensure reliable accounting, uphold company policies, etc.

Committee of Sponsoring Organizations (COSO) five ingredients

1. Control environment

2. Risk assessment

3. Control activities

4. Information & communication

5. Monitoring

Principles of Internal Control

Establishing the roles, and responsibilities, and delegation of authority
Establish responsibilities, Maintain adequate control, Insure assets and bond key employees, Separate recordkeeping from custody of assets, etc.

Internal Control (Establish Responsibilities)

Tasks should be clearly established

Tasks should be assigned to one person
Can then determine who is at fault

Blockchain

Secure type of accounting ledger which continuously and simultaneously updates and verifies the ledger

Limitations of Internal Control

Human error, Human fraud, Fraud Triangle, Cost-benefit constraint

Control of Cash

Effective system of internal control that protects cash and cash equivalents
3 basic guidelines:

• Handling cash is separate from recordkeeping for cash

• Cash payments are made by check or EFT

• Cash receipts are promptly deposited in a bank

Liquid assets

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

Cash

currency, coins, and deposits in bank accounts. Includes items such as 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 and not sensitive to changes

Goals of cash management

1. Plan cash receipts to meet cash payments when due

2. Keep a minimum level of cash necessary to operate

Effective cash management strategies

 Encourage collection of receivables.

 Delay payment of liabilities.

 Keep only necessary assets.

 Plan expenditures.

 Invest excess cash

Overage

tracking and recording extra fees, usage limits, or financial discrepancies when actual quantities or cash exceed what was originally planned, budgeted, or contracted

Shortage

the negative difference between expected cash (based on financial records or sales logs) and actual cash-in-hand

Keys to Controlling Cash Payments:

Require all payments to be made by check.

• Limit access to accounting records except for

those who have the authority to sign checks

Cash budget

includes projected cash receipts and cash payments

Voucher system

Establishes procedures:

• verifying, approving, and recording liabilities for eventful cash payments

• issuing checks for payment of verified, approved, and record liabilities

Petty cash

Small payments for items such as shipping fees, minor repairs, low-cost supplies

Basic Bank Services

Signature Cards, Bank accounts, checks, Electronic Funds Transfer, Bank Statements, Deposit Tickers

Deposit Ticket

Used to deposit money in the bank
Lists cash and checks along with the amounts

Serves as proof of deposit

Check

Used to withdraw money from the bank

Includes maker, signor of check; payee; and payer

Bank Reconciliation

Prepared periodically to explain the difference between cash reported on the bank statements and the cash balance on company’s books