Internal Control and Cash (Chapter 7)

Internal Control

Systems designed for reliable reporting, efficient operations, and legal compliance.

Preventive Controls

Controls designed to avert the occurrence of an unwanted action.

Detective Controls

Controls designed to indicate that an unwanted action has occurred.

Control Environment

The 'tone at the top' indicating management values integrity and ethics.

Risk Assessment

Identification and analysis of business risk factors and mitigation strategies.

Control Activities

Specific policies and procedures that address identified risks.

Information and Communication

Capturing and sharing pertinent information with appropriate internal and external users.

Monitoring Activities

Periodic evaluation of the internal control system for adequacy.

Assignment of Responsibility

Making specific employees accountable for completing tasks (e.g., individual cash drawers).

Segregation of Duties

Splitting authorization, recording, and asset custody among different individuals.

Documentation Controls

Using pre-numbered source documents to provide evidence of transactions.

Physical Controls

Safeguarding assets and enhancing record accuracy using physical barriers or locks.

Review and Reconciliation

Independent comparison of two or more documents to ensure accuracy.

Internal Auditors

Employees responsible for evaluating the effectiveness of internal control systems.

External Auditors

Independent auditors hired to report if financial statements fairly present results.

Reasonable Assurance

The concept that internal controls cannot provide an absolute guarantee.

Collusion

Two or more individuals working together to circumvent control activities.

Management Override

When management uses their authority to bypass established control activities.

Fraud

Intentional actions to misappropriate assets or misstate financial information.

Fraud Triangle: Opportunity

A workplace environment that allows an employee to commit fraud.

Fraud Triangle: Pressure

Motivation such as financial problems or meeting performance targets.

Fraud Triangle: Rationalization

Justification or excuses for dishonest actions.

Outstanding Cheques

Cheques written by the company but not yet deposited or cashed.

Deposits in Transit

Deposits recorded by the company but not yet recorded by the bank.

Bank Reconciliation

Process of matching the bank statement balance with the company's book balance.

Cash Equivalents

Short-term, highly liquid held-for-trading investments with insignificant risk of value change.

Bank Indebtedness

A cash deficit or overdraft position at year-end, reported as a current liability.

Cash Budget

Projection of anticipated cash flows to indicate financing needs or investment availability.

Principle of Idle Cash

Excess cash should be invested because no return is earned on cash on hand.

Inventory Management (Cash)

Keeping inventory levels low to minimize the amount of cash tied up.