Week 2 (Internal Controls, Accounting for Cash & Ethics)

What are internal control systems?

• Policies & procedures designed to ensure reliable financial reporting, effective, & efficient operations, & compliance w/ applicable laws & regulations

• Procedures to safeguard assets against theft or unauthorized use

What is the Sarbanes-Oxley Act (2002)?

• Section 404 of SOX places responsibility on management for establishing & maintaining a sound internal control structure over financial reporting

• SOX requires public companies to annually review their internal controls over financial reporting & issue a report of their assessment

What is COSO framework?

• Committee on Sponsoring Organizations of the Treadway Commission

• Recognized as leading framework for designing, implementing, & conducting internal controls systems & assessing effectiveness of internal control systems

What are the 5 aspects of COSO framework?

1. Control environment- integrity & ethical values of company

2. Risk assessment- management identification of pot. risks

3. Control activities- internal controls

4. Info & communication- internal & external reporting process

5. Monitoring- over time assessment & correction of internal controls

What are cash equivalents?

Short-term, highly liquid investments that are:

• Readily convertible into known amounts of cash

• So near their maturity that they present insignificant risk of changes in value b/c of changes in interest rates

What are cash equivalents generally only investments w/?

Original maturities of 3 months or less to entity holding the investment

What are the examples of cash equivalents?

• US Treasury bills

• Commercial paper

• Money market mutual funds

What is bank reconciliation?

A comparison of the bank balance w/ book balance is usually made money by means of a summary

How many types of differences b/w bank statement & depositor’s records arise?

4 common types

• Deposit in transit

• Outstanding checks

• Bank services charges & NSF checks

• Collection of receivables by the bank

What is a deposit in transit?

A deposit made near the end of the month & recorded on the depositor’s books, but not reflected in bank statement

What are outstanding checks?

Checks written near the end of the month that have reduced the depositor’s cash balance & have not cleared the bank by statement date

What are bank service charges?

• A monthly fee charged by the bank

• Depositor must deduct this amount from the recorded cash balance

What are NSF checks?

Return of a customer’s check for which insufficient funds are available

What is collection of receivables by the bank?

Amount owed to depositor paid directly to the bank by the 3rd party & is added to depositor’s account

What happens to balance per bank statement w/ deposits in transit?

Add

What happens to balance per bank statement w/ outstanding checks?

Less

What happens to balance per bank statement w/ collection of receivables?

Add

What happens to balance per bank statement w/ bank service charges & NSF checks?

Less