College Accounting chapter 7

Sarbanes-Oxley Act

maintains public confidence and trust in the financial reporting of companies, only applies to publicly held companies

Internal control

the policies and procedures used to safeguard assets, ensure accurate business information, and ensure compliance with laws and regulations

Objectives of internal control

• Assets are safeguarded and used for business purposes.

• Business information is accurate.

• Employees and managers comply with laws and regulations.

Employee fraud

the intentional act of deceiving an employer for personal gain

Elements of internal control

the elements that together sustain internal control and include the control environment, risk assessment, control activities, information and communication, and monitoring

Control environment

the overall attitude of management and employees about the importance of controls

Factors influencing a company’s control environment

• Management’s philosophy and operating style

• The company’s organizational structure

• The company’s personnel policies

Control procedures

provide reasonable assurance that business goals will be acheived, including the prevention of fraud

• Competent personnel, rotating duties, and mandatory vacations

• Separating responsibilities for related operations

• Separating operations, custody of assets, and accounting

• Proofs and security measures

Monitoring

• used to locate weaknesses and improve controls

• includes observing employee behavior and the accounting system for indicators of control problems

Cash

coins, currency (paper money), checks, money orders, and money on deposit that is available for unrestricted withdrawal from banks and other financial institutions

Businesses normally receive cash from two main sources:

• Customers purchasing products or services

• Customers making payments on account

Cash short and over account

an account in which are recorded errors in cash sales or errors in making change causing the amount of actual cash on hand to differ from the beginning amount of cash plus the cash sales for the day

Electronic Funds Transfer (EFT)

a system in which computers rather than paper (money, checks, etc.) are used to effect cash transactions

Companies encourage customers to use EFT for the following reasons:

• EFTs cost less than receiving cash payments through the mail.

• EFTs enhance internal controls over cash, since the cash is received directly by the bank without any employees handling cash.

• EFTs reduce late payments from customers and speed up the processing of cash receipts.

Voucher system

a set of procedures that uses vouchers for authorizing and recording liabilities and cash payments

Voucher

any document that serves as proof of authority to pay cash or issue an electronic funds transfer, but for many businesses, is a special form used to record data about a liability and the details of its payment

Petty cash fund

a special cash fund to pay relatively small amounts

Special-purpose funds

cash funds used for a special business need