Chapter 7 example #19126

26 October 2022
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Sarbanes-Oxley Act of 2002
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Applies to publicly traded companies. Purpose is to restore public confidence and trust in the financial statements of companies. Requires companies to maintain strong and effective internal controls over the recording of transactions and the preparing of financial statements.
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Internal control
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Procedures and processes used by a company to: Safeguard its assets Process information accurately Ensure compliance with laws and regulations
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Employee fraud
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Intentional act of deceiving an employer for personal gain.
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Elements of internal control
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1. Control environment 2. Risk assessment 3. Control procedures 4. Monitoring 5. Information and communication
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Control environment
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Overall attitude of management and employees about the importance of controls. Three factors influencing: 1. Management's philosophy and operating style 2. Company's organizational structure 3. Company's personnel policies
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Control procedures
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Provide reasonable assurance that business goals will be achieved. Include: - Competent personnel, rotating duties, and mandatory vacations - Separating responsibilities for related operations - Separating operations, custody of assets, and accounting - Proofs and security measures
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Monitoring
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Used to located weaknesses and improve controls. Often includes observing employee behavior and accounting system. Warning signs of internal control problems: 1. Abrupt change in lifestyle 2. Close social relationships with suppliers 3. Refusing to take a vacation 4. Frequent borrowing from other employees 5. Excessive use of alcohol or drugs
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Limitations of internal control
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- The human element of controls - Cost-benefit considerations
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Cash
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Includes coins, currency (paper money), checks and money orders. Also includes money on deposit with a bank that is available for withdrawal. Asset most likely to be stolen or used improperly in a business.
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Change fund
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Predetermined amount of money that is given to each cash register clerk in a cash drawer
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Cash short and over account
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Difference from amount of cash on hand and amount of cash sales due to errors.
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Remittance advice
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Portion of invoice returned with payment.
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Electronic Funds Transfer (EFT)
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Electronic transfer from checking account.
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Control of cash payments
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Provides reasonable assurance that: - Payments are made for only authorized transactions - Cash is used effectively and efficiently
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Voucher system
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Set of procedures for authorizing and recording liabilities and cash payments. It may be either manual or computerized.
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Voucher
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Any document that serves as proof of authority to pay cash or issue an electronic funds transfer.
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Bank accounts
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Control advantages of __________: - Reduce amount of cash on hand - Accounts provide an independent recording of cash transactions - Facilitates the transfer of funds using EFT systems
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Bank statement
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Summary received from the bank (usually monthly) of all checking account transactions.
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Bank reconciliation
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Analysis of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger. Used to determine the adjusted cash balance.
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Bank section
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Begins with cash balance according to bank statement and ends with adjusted balance.
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Company section
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Begins with cash balance according to the company's records and ends with the adjusted balance.
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Petty cash fund
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Use of a special cash fund for small amounts. The only time _______ _______ is debited is when the fund is initially established or when the fund is increased. The only time it is credited is when the fund is being decreased.
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Special-purpose funds
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Other cash funds used for special needs.
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Cash equivalents
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Company's excess cash that is normally invested in highly liquid investments.
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Compensating balance
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Minimum cash balance required by bank.
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Ratio of cash to monthly cash expenses
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= Cash as of Year-End/Monthly Cash Expenses