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39 Cards in this Set
- Front
- Back
Internal Controls System Purpose
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consists of the policies and procedures managers use to:
-- Protect assets. -- Ensure reliable accounting. -- Promote efficient operations. -- Urge/ mandate adherence to company policies. |
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Principals of Internal Controls
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fundamental internal control principles that apply to all companies.
1. Establish clear responsibilities. 2. Maintain adequate records (FCC rule). 3. Insure assets and bond key employees (prevents internal theft). 4. Separate recordkeeping from custody of assets. 5. Divide responsibility for related transactions. 6. Apply technological controls. 7. Perform regular and independent audits and review. |
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Establish Responsibilities
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Responsibility for a task is clearly established and assigned to one person.
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Maintain Adequate Records
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Protects assets and ensures employees used prescribed procedures
Allows managers to monitor company activities making it difficult for items to be lost or stolen without detection. |
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Insure Assets and Bond Key Employees
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Insuring assets against casualty and theft protects the assets
Bonding employees protects you from and discourages internal theft |
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Separate Record-keeping from Custody of Assets
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A person who controls or has access to an asset must not keep that asset's accounting record.
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Divide Responsibility for Related Transactions
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This ensures that the work of one individual acts as a check on the other.
Example: Placing purchase orders, receiving merchandise, and paying vendor |
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Apply Technological Controls
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Examples: Cash register, check protectors, time clocks, personal identification scanners
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Perform Regular Independent Reviews
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Ensures that procedures are being followed and encourages evaluation of the efficiency/effectiveness of the internal controls
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Technology and Internal Controls:
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-- Reduces processing errors
-- More extensive testing of records (allows managers/auditors to easily/extensively check transactions -- Crucial separation of duties (provides opportunity to separate the responsibilities of related actions) |
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Limitations of Internal Control:
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1. Human error and fraud (most serious)
2. Cost-benefit principle |
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Human fraud is driven by:
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1. Opportunity: internal control deficiencies
2.Pressure: financial, family, society, or other stresses to succeed 3. Rationalization: employees justifying fraudulent behavior |
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Cost-Benefit Principle
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The cost of internal controls must not exceed their benefits.
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Liquidity
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A company’s ability to pay for its near-term obligations.
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Liquid Assets
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(cash and similar assets) can be readily used to settle such obligations.
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Cash
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includes currency, coins, amounts on deposit in bank accounts, checking accounts (demand deposits), many savings accounts (time deposits), customer checks, cashier’s checks, certified checks, and money orders.
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Cash Equivalents
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are short-term, highly liquid investment assets that are readily convertible to a known cash amount and sufficiently close to their due date (90 days or less!!!)
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Cash Equivalents Examples
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Short-term investments in US Treasury bills
Money market funds |
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NOT Cash Equivalents
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Common Stock
Accounts Receivable |
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Cash Management Goal:
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1. Plan cash receipts to meet cash payments when due.
2. Keep a minimum level of cash necessary to operate. |
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Cash Management Principles:
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1. Encourage collection of receivables
2. Delay payment of liabilities 3. Keep only necessary levels of assets 4. Plan expenditures 5. Invest excess cash |
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Encourage collection of receivables:
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The sooner customers or others pay the company the sooner the money can be used.
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Delay payment of liabilities
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Delaying payment to others allows the company to use the money longer.
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Keep only necessary levels of assets
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Money should be invested in productive assets not tied up in idle assets.
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Plan expenditures
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Money should be spent only when it is available
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Invest excess cash
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Excess cash earns no returns and should be invested
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Cash over and short
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Income Statement Account
error between the cash in a cash register and the record of the amount of cash receipts. The difference is reported in the cash over and short account |
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Cash Overages
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Debit Cash
Credit Sales Credit Cash Over and Short |
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Cash Shortage
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Debit Cash
Debit Cash Over and Short Credit Sales |
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Cash Over and Short Debit Balance
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Reflects an expense which gets reported on the income statement as part of general and administrative expenses
Often combined with other small expenses and record as Miscellaneous Expenses |
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Control of Cash Receipts
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Cash receipts are deposited to the bank DAILY
Person handling cash will NEVER get access to the ledger Voucher System |
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Voucher System of Control
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Verifying, approving, and recording obligations for eventual case disbursement
Issuing checks for payment of verified, approved, and recorded obligations |
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Bank Statement
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1. Beginning-of-period balance
2. Checks and other debits (decreases balance) 3. Deposits and other credits (increase balance) 4. End-of-period balance |
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Bank Reconciliation
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Report explaining any differences between the checking account balance according to the depositor's record and the balance reported on the bank statement
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Outstanding Checks
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Checks written (or drawn) by the depositor, deducted on the depositor's records, and sent to the payees but not yet received by the bank
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Deposits in transit
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Deposits made and recorded by the depositor but not yet recorded on the bank statement
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Bank Reconciliation Equation
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Balance per bank statement
+Deposits in transit --Outstanding Checks = Balance per Book |
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Bank Reconciliation items that require adjustment
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Collection of note by bank
NSF check Interest earned Bank charges |
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Petty Cash
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Reported on the Balance Sheet
Established to pay for small payments like postage Used to avoid time and cost of writing checks for small amounts |