Chapter 6: Summary Cheat Sheet

Fraud and Internal Control Internal control refers to the procedures and policies that a company implements to protect its assets, ensure accurate financial reporting, and prevent fraud. Here are the key principles of internal control: 1. Establish Responsibilities: Assign specific tasks to one person to ensure accountability. 2. Maintain Adequate Records: Accurate recordkeeping protects assets and helps monitor company activities. 3. Insure Assets and Bond Key Employees: Assets should be insured, and employees handling cash or valuable assets should be bonded. 4. Separate Recordkeeping from Custody of Assets: Employees who handle assets should not be responsible for maintaining accounting records for those assets. 5. Divide Responsibility for Related Transactions: Tasks related to a transaction should be divided between different individuals or departments to provide checks and balances. 6. Apply Technological Controls: Use technology, such as security systems and ID scanners, to safeguard assets. 7. Perform Regular and Independent Reviews: Periodic reviews of internal controls, ideally by external auditors, help maintain integrity. Control of Cash Cash includes currency, coins, checks, and deposits in bank accounts. Cash equivalents are short-term, highly liquid investments that are convertible to a known amount of cash and have close due dates (e.g., U.S. Treasury bills). Cash management strategies include: • • • • • Encouraging early collection of receivables. Delaying payments to vendors. Keeping only necessary assets. Planning expenditures carefully. Investing excess cash to maximize returns. Cash Receipt and Payment Control Procedures Over-the-counter cash receipts: • All sales are recorded on a cash register, and customers receive a receipt. • • The register maintains a locked-in record, often connected to the accounting system. Employees handling cash should not have access to accounting records, and vice versa, ensuring a separation of duties. Cash over and short journal entries: • • If cash received exceeds recorded sales: Credit "Cash Over and Short." If cash received is less than recorded sales: Debit "Cash Over and Short." Cash receipts by mail: • • • Two employees open the mail, reducing the risk of theft through collusion. A triplicate list of receipts is prepared and distributed to the cashier, recordkeeper, and mail openers. Employees involved in handling cash do not maintain accounting records, ensuring proper separation of duties. Cash payment controls: • • • Payments should be made via check or electronic funds transfer (EFT), with petty cash used only for small expenses. Employees authorized to sign checks should not have access to the accounting records to prevent fraud. A voucher system is used to control all payments, requiring verification before processing. Petty Cash System Petty cash is used for small payments. Key controls for the petty cash system include: • Establishing the fund with an initial entry, such as: plaintext Debit: Petty Cash Credit: Cash • $500 $500 Replenishing the fund involves reimbursing the amount spent and recording related expenses: plaintext Debit: Various Expenses $420 Credit: Cash • $420 Any shortages or overages are recorded in the Cash Over and Short account. For example, if the petty cashbox is $5 short: plaintext Debit: Cash Over and Short Credit: Cash $5 $5 Bank Reconciliation A bank reconciliation matches the company's cash balance in its accounting records (book balance) to the balance reported on the bank statement. Adjustments are made for differences due to timing or errors. Key adjustments: 1. Add deposits in transit (deposits made but not yet recorded by the bank). 2. Subtract outstanding checks (checks written by the company but not yet processed by the bank). 3. Adjust for bank errors or book errors. 4. Add unrecorded collections (e.g., a note collected by the bank). 5. Subtract bank fees and NSF checks (checks returned due to insufficient funds). Example of Bank Reconciliation (Hapley Co.): • • • • • • Bank statement balance: $1,895 Book balance: $1,742 Deposit in transit: $795 Outstanding checks: $638 Customer’s note collected by the bank: $320 Bank service charge: $10 Reconciled balance: 1. Bank side: o Bank balance: $1,895 o Add deposit in transit: +$795 o Subtract outstanding checks: -$638 Adjusted bank balance: $2,052 2. Book side: o o o Book balance: $1,742 Add customer’s note: +$320 Subtract bank service charge: -$10 Adjusted book balance: $2,052 Journal Entries from Reconciliation: 1. Record customer’s note: plaintext Debit: Cash Credit: Notes Receivable $320 $320 2. Record bank service charge: plaintext Debit: Bank Service Expense Credit: Cash $10 $10 Multiple-Choice Quiz Solutions: 1. The $320 note is an addition to the book balance of cash. 2. The reconciled balance is $2,052. 3. The entry to replenish the petty cash fund includes a debit to Cash Over and Short for $5. 4. The days' sales uncollected is 29.2 days. Calculated as: (6,72084,000)×365=29.2 days