978-1118334324 Chapter 7 Lecture Note Part 2

Answer: Some common-sense approaches are to make sure only certain desig-

nated individuals can sign checks. In addition, make sure that different

personnel approve payments and make payments. The next chapter

disbursements.

H. Control Features: Use of a Bank.

1. The use of a bank contributes significantly to good internal control by:

deposits, documented by a deposit slip (ticket).

4. A bank statement shows:

account.

or a not sufficient funds check (NSF).

6. A credit memorandum may identify notes receivable collected by the bank

for the depositor and interest paid on checking account.

I. Reconciling the Bank Account.

2. Issued checks recorded by the company but that have not yet been paid

per bank.

reconciliation schedule.

4. List any unrecorded bank memoranda in the appropriate section of the

reconciliation schedule.

J. Reporting Cash.

2. Cash equivalents are short-term, highly liquid investments that are both:

to changes in interest rate.

3. Restricted cash is cash that is not available for general use but is

restricted for a special purpose. It should be reported separately on the

balance sheet as either a current or noncurrent asset.

A Look at IFRS

Fraud can occur anywhere. Because the three main factors that contribute to

fraud are universal in nature, the principles of internal control activities are used

globally by companies. While Sarbanes-Oxley (SOX) does not apply to non–U.S.

companies, most large international companies have internal controls similar to

those indicated in the chapter. IFRS and GAAP are also very similar in

accounting for cash. IAS No. 1 (revised). “Presentation of Financial Statements,”

is the only standard that discusses issues specifically related to cash.

KEY POINTS

 The fraud triangle discussed in this chapter is applicable to all international

companies. Some of the major frauds on an international basis are

Parmalat (Italy), Royal Ahold (the Netherlands), and Satyam Computer

Services (India).

 Rising economic crime poses a growing threat to companies, with nearly

one-third of all organizations worldwide being victims of fraud in a recent

12-month period. The survey data shows that the incidence of economic

immune (PricewaterhouseCoopers’ Global Economic Crime Survey, 2009).

 Economic crime takes on many different forms, some more common than

others. The three most common types of economic crimes experienced in

the last 12 months were asset misappropriation, accounting fraud, and

bribery and corruption.

principles-based standards.

 On a lighter note, at one time the Ig Nobel Prize in Economics went to the

Research (AIR), they are presented by a group that includes genuine Nobel

laureates at a ceremony at Harvard University’s Sanders Theater. (See

en.wikipedia.org/wiki/Ig_Nobel_Prize.)

 Internal controls are a system of checks and balances designed to prevent

required under SOX.

 Companies find that internal control review is a costly process but badly

needed. One study estimates the cost of SOX compliance for U.S.

companies at over $35 billion, with audit fees doubling in the first year of

compliance. At the same time, examination of internal controls indicates

(PricewaterhouseCoopers’ Global Economic Crime Survey, 2005).

 The SOX internal control standards apply only to companies listed on U.S.

exchanges. There is continuing debate over whether foreign issuers should

have to comply with this extra layer of regulation.

 The accounting and internal control procedures related to cash are

 Cash is comprised of cash on hand and demand deposits.

 Cash equivalents are short-term, highly liquid investments that are

readily convertible to known amounts of cash and which are subject to

an insignificant risk of changes in value.

statement of financial position.

LOOKING TO THE FUTURE

countries.

High-quality international accounting requires both high-quality accounting

standards and high-quality auditing. Similar to the convergence of GAAP and

IFRS, there is movement to improve international auditing standards. The

http://www.ifac.org/iaasb/.

Under proposed new standards for financial statements, companies would not be

allowed to combine cash equivalents with cash.

20 MINUTE QUIZ

Circle the correct answer.

True/False

1. An effective system of internal control will segregate functions between individuals to reduce

the potential for errors and fraud.

True False

2. When one individual is responsible for all of the related activities, the potential for errors and

fraud is increased.

True False

3. Independent internal verification should be made periodically and should be done by an

True False

4. The duties of receiving cash, recording cash receipts transactions, and having custody of

True False

5. At the end of an accounting period, a debit balance of $99.00 in the Cash Over and Short

True False

6. A check is a written order signed by the depositor directing the bank to pay a specified

sum of money to a designated recipient.

True False

7. Cash proceeds collected by the bank for a depositor would be identified in the bank

True False

8. The lack of agreement between the balance per books and the balance per bank is due

True False

9. An outstanding check that was also outstanding the previous month should not be included

in the reconciliation of the bank statement this month.

True False

10. A postage due expense of $4.75 would be paid out of petty cash and the entry to record

the transaction would reduce the balance of the Petty Cash account by that amount.

True False

Multiple Choice

1. Which of the following is a primary concern of internal control?

a. Promote training programs and control incentives

b. Enhancing the reliability of accounting data

c. Ensuring fairness of the financial statements

d. Encouraging adherence to prescribed managerial performance

2. Each of the following is an attribute of internal control except

a. segregation of duties.

b. establishment of responsibility.

c. independent internal verification.

d. a sound marketing plan.

ciliation, the $18 should be

a. deducted from the balance per bank.

b. added to the balance per bank.

c. deducted from the balance per books.

d. deducted from the balance per books and added to the balance per bank.

Cash in bank—savings account $4,000

Amounts due from customers 7,000

Post-dated checks 2,000

Checking account balance 6,000

Which amount should be reported as cash in the balance sheet?

a. $10,000

b. $6,000

c. $11,000

d. $13,000

replenishment would include a

a. credit to Cash for $81.

b. credit to Cash Over and Short for $2.

c. debit to Cash for $81.

d. debit to Cash Over and Short for $2.

ANSWERS TO QUIZ

True/False

Multiple Choice