Financial Accounting Exam #2 - Memorization

• Separation of Duties 

• Quality of Employees 

• Bonded Employees 

• Required Absences 

• Procedurals Manual 

• Authority and Responsibility 

• Prenumbered Documents 

• Physical Control 

• Performance Evaluations 

9 Key Features of Internal Control

Pressure 

• Inability to pay bills 

• Sick relative 

Opportunity 

• Opportunity is there 

• Internal controls reduce opportunity 

Rationalization 

• The company owes them 

• Underpaid 

• Undervalued 

Fraud Triangle

• Up to date signature card should be maintained 

• Cash receipts should be recorded immediately upon receipt and deposited intact daily 

• A deposit ticket should be used for all deposits 

• Cash payments should be made by prenumbered check 

• A monthly bank reconciliation should be prepared by an independent party 

Controlling Cash (5 ways)

Separation of Duties

When duties are separated, the work of one employee can act as a check on the work of another employee 

• The likelihood of fraud or theft is greatly reduced 

• Example 1: 

• One staff member writes the check 

• A different staff member completes the bank reconciliation 

• Example 2: 

• One staff members issues petty cash 

• A different staff member counts/audits and records petty cash 

Quality of Employees

• The ability of cross-trained employees to substitute for one another prevents disruptions in the workplace 

• Job rotation may help relieve boredom and increase productivity 

• Also a good fraud protection as regularly someone else will be checking your work 

Bonded Employees

• A fidelity bond provides insurance that protects a company from loss caused by employee dishonesty 

• To become bonded, an employee’s background is investigation 

• Example: 

• Construction companies 

• House cleaners 

Required Absences

• An employee may be able to cover up fraudulent activities if they are always present at work 

• All employees should be required to take regular vacations and their duties should be rotated periodically 

• Be cautious of someone who refuses to take vacation or allow inspection of books 

Procedures Manual

• Accounting and other important procedures should be written in a procedures manual 

• Periodically, management should conduct an investigation to see that required procedures are actually being followed 

• Note: 

• It's important to keep procedural manuals current 

Authority and Responsibility

General Authority 

• Applies to all members of the organization 

• For example, all employees are required to fly coach and purchase airline tickets from a specific vendor 

Specific Authority 

• Applies only to a specific position within the organization 

• For example, all checks must be cosigned by the Controller and Treasurer 

Prenumbered Documents

Prenumbered forms are used for all important documents 

• Checks 

• Purchase Orders 

• Receiving Reports 

• Invoices 

• The use of prenumbered forms helps keep track of all forms issued during a particular period 

• Note: Management must regularly check that no numbers are missing 

Physical Control

• Cash and cash equivalents (gift cards) should be kept in a safe 

• All companies should maintain adequate physical control over valuable assets that may be misappropriated 

• For example, inventory should be properly stored in a secure location 

• Serial numbers should be placed on all valuable assets to assist in a physical count of these assets 

Performance Evaluations

• Internal controls should include independent verification of employee performance 

• For example, someone other than the person who has control over inventory should take a physical count of inventory 

• Internal and external audits serve as independent verification of performance 

• 360 evaluation