Ch 6: Cash, Fraud, and Internal Control Key Terms

A complete set of vocabulary flashcards covering terms, technology, internal control principles, and cash management concepts from the accounting lecture notes.

Artificial intelligence (AI)

Computer systems that can perform tasks typically requiring human intelligence, such as problem-solving, learning, and pattern recognition, by processing large amounts of data and using algorithms.

What is a bank account?

An account used to deposit money for safekeeping and helps control withdrawals

Bank reconciliation

Report that explains the difference between the book (company) balance of cash and the cash balance reported on the bank statement, for purposes of computing the adjusted cash balance.

Bank statement

Bank report on the depositor’s beginning and ending cash balances, and a listing of its changes, for a period.

Which of the following things are included in a bank statement?

1. Beginning-of-period account balance

2. Withdrawals and other decreases to the account during the period

3. Deposits and other increases to the account during the period

4. End-of-period account balance

What are some common deductions on a bank statement?

1. bank service fees

2. checks deposited that are uncollectible

3. corrections of previous errors

4. withdrawals through automated teller machines (ATMs)

5. payments arranged in advance by depositor

Blockchain

Technology used to create a secure ledger of transactions.

Canceled checks

Checks that the bank has paid and deducted from the depositor’s account.

Cash

Includes currency, coins, and amounts on deposit in bank checking or savings accounts.

What items does cash also include?

customer checks, cashier’s check, certified checks, and money orders

Cash equivalents

Short-term investment assets that are readily convertible to a known cash amount or sufficiently close to their maturity date (usually within $90$ days) so that market value is not sensitive to interest rate changes. (Ex: U.S. Treasury bills)

What is a common reason companies fail?

Inability to manage cash

What are the goals of cash management?

1. Plan cash receipts to meet cash payments when due.

2. Keep a minimum level of cash necessary to operate.

Who is responsible for cash management?

The treasurer

Effective cash management involves applying which cash management strategies?

• Encourage collection of receivables: The quicker that customers and others pay the company, the quicker it can use the money. Some companies offer discounts for quicker payments.

• Delay payment of liabilities: The more delayed a company is in paying others, the more time it has to use the money. Companies regularly wait to pay bills until the last day allowed.

• Keep only necessary assets: Acquiring expensive and rarely used assets can cause cash shortages. Some companies lease warehouses or rent equipment to avoid large up-front payments.

• Plan expenditures: Companies must look at seasonal and business cycles to plan expenditures when money is available.

• Invest excess cash: Excess cash earns no return and should be invested in productive assets like factories. Excess cash from seasonal cycles can be placed in a short-term investment for interest.

What are projected cash receipts and cash payments summarized in?

a cash budget

Cash Over and Short

Income statement account used to record cash overages and cash shortages arising from errors in cash receipts or payments.

Check

Document signed by a depositor instructing the bank to pay a specified amount to a designated recipient.

A check involves what three parties?

1. a maker who signs the check

2. a payee who is the recipient

3. a bank (or payer) on which the check is drawn

What are some types of check fraud?

• Forged signatures — legitimate checks with fake payer signature

• Forged endorsements — stolen check that is endorsed and cashed by someone other than the payee

• Counterfeit checks — fraudulent checks with fake payer signature

• Altered checks — legitimate check altered (such as changed payee or amount) to benefit perpetrator

• Check kiting — deposit checks immediately with from one bank account (without sufficient funds) into a second bank account

Check register

Another name for a cash payments journal when the journal has a column for check numbers.

Cloud storage

A service that allows users to store and access data on remote servers via the Internet, providing a scalable and secure solution for data management and backup.

Committee of Sponsoring Organizations (COSO)

Committee of Sponsoring Organizations of the Treadway Commission (or COSO) is a joint initiative of five private sector organizations and is dedicated to providing thought leadership through the development of frameworks and guidance on enterprise risk management, internal control, and fraud deterrence.

The Committee of Sponsoring Organizations (COSO) lists what five ingredients of internal control that add to the quality of accounting:

• control environment—company structure, ethics, and integrity for internal control

• risk assessment—identify, analyze, and manage risk factors

• control activities—policies and procedures to reduce risk of loss

• information and communication—reports to internal and external parties

• monitoring—regular review of internal control effectiveness

Data analytics

A process of analyzing data to identify meaningful relations and trends; in accounting, data analytics helps individuals make informed business decisions.

All e-commerce transactions involve at least three risks:

1. credit card number theft

2. computer viruses

3. impersonation or identity theft

Days’ sale uncollected

Measure of the liquidity of receivables, computed by dividing the current balance of receivables by the annual credit (or net) sales and then multiplying by $365$; also called days’ sales in receivables.

Deposit ticket

Lists items such as currency, coins, and checks deposited and their corresponding dollar amounts.

Deposits in transit

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

Electronic funds transfer (EFT)

Use of electronic communication to transfer cash from one party to another.

What are some of the many internal control benefits that mobile banking services offer?

• 24/7 Access: Monitor cash balances and view transactions anywhere and anytime

• Phone Alerts: Receive real-time alerts for large or unusual transactions

• Mobile Deposit: Deposit checks immediately with a phone camera to reduce risk of theft or loss

• Mobile Payment: Make payments using services like Zelle, removing the need to risk the use of cash or checks

Enterprise resource planning (ERP)

Software programs that manage a company’s vital operations, which range from order taking to production to accounting.

Firewall

A security system that monitors and controls incoming and outgoing network traffic to protect devices and data from unauthorized access or malicious activity.

Fraud Triangle

Highlights three factors that push a person to commit fraud: opportunity, pressure, and rationalization.

Internal control system

All policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies.

Why do managers use internal control systems?

to prevent avoidable losses, plan operations, and monitor company and employee performance

Internal controls have what two limitations?

1. Human error or fraud

2. The cost-benefit constraint

Internal controls protect cash and meet what three guidelines?

1. Handling cash is separate from record keeping of cash

2. Cash receipts are promptly deposited in a bank

3. Cash payments are made by check or electronic funds transfer (EFT)

What are the types of technology internal controls?

• Reduced Processing Errors

• More Extensive Testing of Records

• New Evidence of Processing

• Separation of Duties

• Increased E-Commerce

Invoice

Itemized record of goods prepared by the vendor that lists the customer’s name, items sold, sales prices, and terms of sale.

Invoice approval

Document containing a checklist of steps necessary for approving the recording and payment of an invoice; also called check authorization.

Liquid assets

Resources such as cash that are easily converted into other assets or used to pay for goods, services, or liabilities.

In what order are liquid assets reported on a balance sheet?

The most liquid assets are usually reported first and the least liquid assets are reported last

Liquidity

Availability of resources to meet short-term cash requirements.

NSF Check

non-sufficient funds check (uncollectible)

Outstanding checks

Checks written and recorded by the depositor but not yet paid by the bank at the bank statement date.

Petty cash

Small amount of cash in a fund to pay minor expenses; accounted for using an imprest system.

What are petty cash payments?

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

Principles of internal control

Principles prescribing management to establish responsibility, maintain records, insure assets, separate recordkeeping from custody of assets, divide responsibility for related transactions, apply technological controls, and perform reviews.

Purchase order

Document used by the purchasing department to place an order with a seller (vendor).

Purchase requisition

Document listing merchandise needed by a department and requesting it be purchased.

Receiving report

Form used to report that ordered goods were received and to describe their quantity and condition.

Robotic process automation (RPA)

The use of software bots to automate repetitive and rule-based tasks, improving efficiency and reducing errors in accounting processes.

Sarbanes-Oxley Act (SOX)

Legislation that created the Public Company Accounting Oversight Board, regulates analyst conflicts, imposes corporate governance requirements, enhances accounting and control disclosures, impacts insider transactions and executive loans, establishes new types of criminal conduct, and expands penalties for violations of federal securities laws.

What are some of the requirements from Sarbanes-Oxley Act (SOX)?

• The company must have effective internal controls

• Auditors must evaluate internal controls

• Violators receive harsh penalties- up to 25 years in prison with fines

• Auditors’ work is overseen by the Public Company Accounting Oversight Board

Signature card

Includes the signature of each person authorized to sign checks on the bank account.

Two-factor authentication (2FA)

A security measure that requires two separate forms of identification before one can gain access to an account, which usually combines something users know (like a password) with something they have (like a mobile device).

Vendee

Buyer of goods or services.

Vendor

Seller of goods or services.

Virtual private networks (VPN)

A secure, encrypted connection between a user’s device and a private network, enabling users to transmit data securely over networks.

Voucher

Internal file used to store documents and information to control cash disbursements and to ensure that a transaction is properly authorized and recorded.

Voucher register

Journal (referred to as book of original entry) in which all vouchers are recorded after they have been approved.

Voucher system

Procedures and approvals designed to control cash disbursements and acceptance of obligations.

What does the voucher system consist of?

• Verifying, approving, and recording liabilities for cash payment

• Issuing checks for payment of verified, approved, and recorded liabilites