Chapter 7

Front 1

Fraud

Back 1

dishonest act by employee that results in personal benefit at a cost to the employer

Front 2

3 main factors that contribute to fraudulent activity

Back 2

opportunity
financial pressure
rationalization

Front 3

Sarbanes-Oxley Act

Back 3

corporations are required to maintain an adequate system of internal control. its up to execs to ensure these controls are reliable and effective

Front 4

5 components of internal control

Back 4

control environment
risk assessment
control activities(most important)
information and communication
monitoring

Front 5

Principles of Internal Control activities

Back 5

6 of them, the backbone of the company's efforts to address the risks its faces, such as fraud

Front 6

Establishment of responsibility
(1 of 6 principals of control activities)

Back 6

assign responsibility to specific employees, control is most effective when only one person is responsible for given task

Front 7

Segregation of Duties
(1 of 6 principals of control activities)

Back 7

1. different individuals should be responsible for related activities (to reduce potential for errors and irregularities)
2. segregation of record-keeping from physical custody (one maintains cash balance per books, one maintains custody of cash on hand)
2.

Front 8

Documentation Procedures
(1 of 6 principals of control activities)

Back 8

1. prenumbered documents so they can all be accounted for
2. promptly forward documents for timely recording

Front 9

Physical Controls
(1 of 6 principals of control activities)

Back 9

safeguard of assets: safes, vaults, locked warehouses, biometrics for access to computers, alarms, time clocks

Front 10

Independent Internal Verification
(1 of 6 principals of control activities)

Back 10

Review of data prepared by employees (think of segregation diagam, she's in the mix)

Front 11

Human Resource Controls
(1 of 6 principals of control activities)

Back 11

1. Bond employees who handle cash: employees are carefully screened by insurance company before adding them to the policy and employees know insurance company will persecute all offenders
2. rotate employees duties and require them to take vacations
3. BACKGROUND CHECKS

Front 12

Bonding

Back 12

obtaining insurance protection against theft by employees

Front 13

reasonable assurance

Back 13

the costs of establishing control procedures should not exceed their expected benefit

Front 14

voucher system

Back 14

network of approvals by authorized individuals, acting independently, to ensure that all disbursements by check are proper

Front 15

voucher

Back 15

authorization form prepared for each expenditure in a voucher system

Front 16

petty cash fund

Back 16

cash fund used to pay relatively small amounts.

Front 17

bank reconciliation

Back 17

process of comparing the bank's balance with the company's balance and explaining the differences to make them agree

Front 18

NSF check (not sufficent funds)

Back 18

check that is not paid by a bank because of insufficiant funds in a bank account
~the bank debits (decreases) the depsositor's acct
~creates an accounts recievable for the depositor and reduces cash in the bank acct

Front 19

Step 1 of bank reconciliation: deposits in transit

Back 19

deposits recorded by the depositor that have not been recorded by the bank
*ADD these deposits to the balance per bank

Front 20

Step 2 of bank reconcilation: Outstanding Checks

Back 20

issued checks recorded by the company that have not been paid by the bank
*DEDUCT from the balance per the bank

Front 21

Step 3 of bank reconcilation: Errors

Back 21

note errors made in previous steps
*all errors made by depositor are reconciling items -cash balance per books
*errors by bank - cash balance per the bank

Front 22

Step 4 of bank reconcilation: Bank Memoranda

Back 22

ex: bank would deduct from the balance per books $5 debit memorandum for bank service charges, similarly add to balance per books $32 credit memorandum for interest earned

Front 23

Entries from Bank Reconcilation: Collection of note recievable

Back 23

cash 100
micellanious expense 10
-> notes rec 90
-> interest rev 20

Front 24

Entries from Bank Reconcilation: Book Error

Back 24

cash 36
->accounts payable 36
(to correct error in recording check)

Front 25

Entries from Bank Reconcilation: NSF Check

Back 25

Accounts Recievable 425
->cash 425
(to record NSF check) an NSF check becomes an accounts recievable to the depositor

Front 26

Entries from Bank Reconcilation: Bank Service charges

Back 26

Miscellaneous expense 30
-> cash 30
(to record charge for printing checks)

Front 27

5 Basic principles of cash management

Back 27

1. increase the speed of recievables collection
2. keep inventory levels low
3. delay payments of liabilities (use full payment period)
4. plan the timing of major expenditures
5. invest idle cash

Front 28

Cash budget

Back 28

Beginning cash balance xxx
Add: ((CASH RECIEPTS) xxx

Total Available Cash xxx
Less: ((CASH DISBURSEMENTS)) xxx

Excess of available cash over cash disembursements xxx
((FINANCING NEEDED)) xxx

ending cash balance xxxxx

Front 29

items of cash budget

Back 29

1. Cash reciepts: cash sales and collections from customers on credit sales, anticipated reciepts on interest and dividends..etc
2. cash disbursements: expected payments for inventory, labor, overhead, and selling and admin expenses. also includes projected payments for in come taxes, dividends, investments, and plant assets.
3. financing: shows expected borrowings and repayment of borrowed funds plus interest

Front 30

cash equivalents

Back 30

short-term, highly liquid investments that can be converted to a specific amt of cash