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BFIN141 - CHAPTER 7 - INTERNAL CONTROL & CASH, Study notes of Accounting

Capilano UniversityAccounting

BFIN141 - CHAPTER 7 - INTERNAL CONTROL & CASH SUMMARY PRACTICE QUESTIONS PRACTICE EXERCISE & ANSWER

Typology: Study notes

2020/2021

Available from 12/03/2021

gracechan
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Monday, November 8, 2021
Chapter 7: Internal Control and Cash
BFIN 141
Internal control
-Prevent avoidable losses, help managers plan operations, and monitor company
and human performance.
-Internal control system:
+ Is all policies and procedures used to:
—> Protect assets
—> Ensure reliable accounting
—> Promote efficient operations
—> Encourage adherence to company policies
-CAR principle:
+ C - Custody
+ A - Authorization
+ R - Recording
=> These 3 duties must always be performed by separate individuals to
strengthen the control environment and reduce the potential for errors and reduce
opportunities for fraud to take place.
A control weakness can be identified when 2 or more of these tasks are
performed by the same or related individuals.
-Principle of Internal Control:
+ Fundamental principles of internal control
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Download BFIN141 - CHAPTER 7 - INTERNAL CONTROL & CASH and more Study notes Accounting in PDF only on Docsity!

Monday, November 8, 2021

Chapter 7: Internal Control and Cash

BFIN 141

Internal control

- Prevent avoidable losses, help managers plan operations, and monitor company

and human performance.

- Internal control system:

  • Is all policies and procedures used to: —> Protect assets —> Ensure reliable accounting —> Promote efficient operations —> Encourage adherence to company policies

- CAR principle:

  • C - Custody
  • A - Authorization
  • R - Recording => These 3 duties must always be performed by separate individuals to strengthen the control environment and reduce the potential for errors and reduce opportunities for fraud to take place. A control weakness can be identified when 2 or more of these tasks are performed by the same or related individuals.

- Principle of Internal Control:

  • Fundamental principles of internal control

-> Apply to all companies requiring management to ensure transactions and activities are authorized, maintain records, insure assets, separate record keeping and custody of assets, establish a separation of duties, apply technological controls, and perform internal and external audits.

  1. Establish a Separation of Duties
  • (^) Separation of duties (Segregation of duties):
    • Involves diving responsibility for related transactions between 2 or more individuals or departments.
    • Specially the custody, authorization, and recording of assets should be performed by different individuals.
    • Authorization & custody of assets:
      • Need to be separate to prevent theft of goods.
      • Requiring 2 signatures on cheques also works to verify that disbursements comply with policies and procedures.
    • Record-keeping:
      • To ensure a person who controls or has assess is not responsible for maintaining that asset’s accounting period.
      • Collusion: an act in which two or more people agree to commit a fraud.
    • Authorization and record keeping:
      • Cheque-writing activities should not be controlled by a computer operator in order to avoid risk of fraud.
  1. Ensure Transactions and Activities Are Authorized
    • Establish responsibilities for each task clearly for each position in the company.
  • These external auditors are required to document the controls for every financial statement line item and test existing controls.
  • Solving problems related to controls:
    1. Identify the weakness
    2. explain the implication of how the weak control will cause issues/ errors
    3. provide a recommendation to resolve the identified weakness. 3 Drivers of Fraud: Cash
  • Includes items such as currency , coins, amounts on deposit in bank accounts, chequering accounts, and most cash savings.
  • (^) Includes items that are acceptable for deposit in these accounts, such as customers’ cheques, cashiers’ cheques, certified cheques, money orders, currency, and deposits made through electronic funds transfer (EFT).
  • (^) Many companies invest idle cash in short term investment called cash equivalents to increase earnings.

Liquidity

  • Refers to how easily an asset can be converted into another asset or used in paying for services or obligations.
  • (^) Cash and cash equivalents are called liquid asset because they are converted. Easily into other assets or used in paying for services or liabilities.

Control of Cash Receipts

Internal control of cash receipts ensure that all cash received is accurately recorded and deposited. Over the counter cash receipts

  • Should be recorded on a cash register at the time of each sale for internal control.
  • To help ensure that correct amounts are entered, each register should be positioned so customers can read the amounts entered. Cash Over and Short
  • An income statement account used to record cash shortages and cash overages arising from omitted petty cash receipts and from errors in making change. Cash receipts by Mail Control of Cash Disbursements
  • Three way match
  • Is a good control for cash disbursements.
  • (^) A copy of the approved purchase order, receiving report, and invoice must be “matched” or present before any cash disbursement is approved.

Increasing or Decreasing Petty Cash Fund

Banking Activities as Controls

Basic Bank Service

  • Bank Account:
    • Is a record set up by a bank for a customer, permitting this customer to deposit money for safeguarding and providing the opportunity to make payments through cheque, cash and electronic fund transfer (EFT) withdrawals. To control access to a bank account, all persons authorized to use a bank account must sign a signature card.
  • A signature card
  • Includes the signature of each person to authorized to sign cheques from the account.
  • Bank deposit:
  • Deposit slips: to list the items such as currency, coins, and cheques included in the deposit along with each of their dollar amounts. When the deposit is brought to the bank, the company is provided a copy of the deposit slip or a deposit receipt as a proof of the deposit.
  • Bank cheque:
  • A cheque: is a document signed by the depositor instructing the bank to pay a specified amount of money to a designed recipient.
  • Electronic Funds Transfer (EFT)
  • is the use of of electronic communication to transfer cash from one party to another.

Bank Statement

1) Beginning of month balance of the depositors account

2) Cheques and other debits decreasing the account during the

month

3) Deposits and other credits increasing the account during the

month.

4) End of month balance of the depositor’s account.

—> Deposits are called Credits —-> Cheques are called debits on the bank statement

  • (^) Cancelled cheques: are cheques that the bank has paid and deducted from the customer’s account during the month.
  • (^) Other deductions also often appear on a bank statement:
    • (1) services charges and fees assessed by the bank
    • (2) customers’ cheques deposited that are uncollectible +(3) corrections of previous errors +(4) withdrawals through automated teller machines (ATM). +(5) periodic payments arranged on advance by a depositor such as insurance and lease payments. For service charges, the bank notifies the depositor of each deduction with a debit memo when the bank reduces the balance. A copy of each debit memo is usually sent with the monthly statement. Bank Reconciliation
    • PurposeL is to reconcile the two balances and explain or account for the differences in these two balances.
    • Among the factors causing the bank statement balance to differ from the depositors book balance are:
    1. Unrecorded deposits (Deposits in transit/ Outstanding deposits) - made and recorded by the depositor but not yet captured on the bank statement.
    2. Outstanding cheques: These are cheques written/drawn for outstanding payables and expenses, resulting in a decrease in the company’s cash account.
    3. Errors: both banks and depositors can make errors.

Practice questions:

  1. The following asset has the highest risk of theft: a) Inventory b ) Cash c) Land d) Property, plant and equipment.
  2. The fundamental principles of internal control include which of the following: a) Establish a separation of duties b) Ensure transaction are authorized c) Maintain records d) All of the above
  3. The three drivers of fraud include: a) Opportunity, intrinsic, and motivation b) Opportunity, honesty, and motivation c ) Opportunity, rationale, and motivation d) None of the above
  4. Internal audits help the internal control environment by: a ) Regularly and independently testing to make sure internal control procedures are followed b) Directing and training employees to follow the employee handbook c) Reporting results to external users of financial statements d) All of the above

a) Dr.Petty Cash $XXX, Cr. Cash $XXX b) Dr. Petty Cash $XXX, Cr. Supplies $XXX c) Dr. Cash $XXX, Cr. Petty Cash $XXX d) Dr. Cash Over and Short $XXX, Cr. Petty Cash $XXX

  1. Credit card transactions typically cost companies a fee. This cost is recorded as: a) Cost of Goods sold b) Sales c) Credit card expense

d) Merchandise Inventory

  1. Outstanding cheques are __________ the _________ balance on the bank reconciliation. a) deducted from, bank b) added back to, bank c) deducted from, book d) added back to, book
  • established a $200 petty cash fund on Jan 1
  • Jan8: the fund contained
  • $46.85 in cash and receipts for these expenditures:
    • Postage : $51.
    • Transportation-in (Merchandise inventory): $35.
    • Store-supplies: $41.
    • A withdraw: $25. Cash: $170,000 x 0.5% = 850 => $170,000 - 850 = $169,
  • The bookkeeper notes that cheque #96 written by Winburn Construction in the amount of $391 was charged against Winfield’s account in error by the bank.