Class Notes from 9/13 - Chapter 4
Class Notes from 9/13 - Chapter 4 acct 2110
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This 2 page Class Notes was uploaded by jemialk on Friday September 23, 2016. The Class Notes belongs to acct 2110 at Auburn University taught by Cornett in Fall 2016. Since its upload, it has received 14 views. For similar materials see Accounting in Accounting at Auburn University.
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Date Created: 09/23/16
Class Notes 9/13 Tuesday, September 13, 2016 12:26 PM Chapter 4 Internal controls are intended to work smart, comply with the laws, and make financial reporting reliable Sarbanes‐Oxley Act Made many people not want to be accountants Jurisdiction over publically traded corporations Good for industry, but about as much fun as having teeth pulled Control Activities Clearly defined authority and segregation of duties makes it much more difficult for one person to get away with stealing a lot of money. Slides 1‐43 - Internal controls are policies and procedures that can protect companies ‐ stakeholders, investors, and customers - Sarbanes‐Oxley Act (2002) ‐ additional regulations for publically traded companies so executives can't claim they didn't understand and thus are not responsible for massive amounts of money being misused, etc. ○ Management MUST produce internal control report AND acknowledge responsibility for establishment and assess effectiveness of controls ○ Principal exec and financial officers must certify responsibility for establishing and maintaining system of controls over financial reporting ○ Cut down on fraud and theft and made financial reporting more effective - Objectives of Internal Controls ○ Keep assets safe ○ Provide accurate information ○ Comply with laws and regulations (GAAP, IFRS, etc.) - Elements of Internal Controls ○ Environment (Control Environment) Philosophy and operating style of management Personnel policies and practices of business Important factor ‐ an individual employee's goals ma ynot be the same as those of other individuals or the business Tone at the top dictates how business will handle issues (hopefully ethically) ○ Risk assessment Strategic risks ‐ possible external threats (competitors, customers, substitute products or services, suppliers, and threat of new competitors (Porter's five) OR political, economic, social, and technological (PEST) Business process risks ‐ internal threats, how company allocates resources to meet its objectives ○ Activities (Control Activities) Most closely related to accounting system and financial statements Clearly defined authority and responsibility □ Specific individuals have the authority for important duties and are held accountable □ Delegation ‐ one person doesn't handle ALL the things. Segregation of duties □ Reduces likelihood one person can conceal their misdeeds in the records because they don't have those permissions □ Also helps prevent unintentional mistakes from going unrecognized Adequate documents and records □ Document everything □ Reliable and accurate accounting records □ Underlying documentation (purchase order, invoice, reasons to know they aren't just numbers in a journal) Safeguards over assets and records □ Physical protection □ Access control (passwords, account management, slide cards, pins, etc.) Checks on recorded amounts □ Records should be checked by someone independent (not a preparer) □ Clerical checks, computer checks, management review ○ Information and communication Timeliness Communicate info to appropriate employees (make sure they have the information they need to do their jobs) Without the above, problems may get too big before they are caught ○ Monitoring Track potential/actual problems Use normal supervising activities to monitor Internal audit groups are good idea in big corporations - Accounting System ‐ methods and records used to identify, measure, record, and communicate financial info about a business - Accounting system and internal control system ‐ 1 big happy family - Cash is a vulnerable area ‐ authority should be clearly defined and delegated and cash records gone over regularly - The paper records (receipt, internal record of receipt) of cash should go to the customer and one area/person/department, and the actual cash for deposit should go to another - Should reconcile bank statement because timing isn't always the same. Someone may pay with a check and then the recipient not deposit it for a while ○ Outstanding checks or checks in transit ○ Service charges don't show in internal records ○ NSF (non‐sufficient funds) ○ Debit or credit memos ○ Errors Cash balance according to bank $xxx Add: Increases to cash not on bank statement $xxx (deposits in transit, etc.) Deduct: Decreases to cash not on bank statement xx $xxx (outstanding checks, etc.) Adjusted Balance $XXX Cash balance according to company $xxx Add: Unrecorded bank increases to cash (credit memos) $xx (notes collected by bank) Deduct: Unrecorded decreases to cash (debit memos) Xx $xxx (NSF checks, service charges, etc.) Adjusted Balance $XXX - After bank reconciliation, make adjustments as needed - Cash should be deposited and reconciled daily. Errors are known as cash over and short ○ Often due to errors in making change - Petty cash to avoid having to cut checks for every little thing ‐ transactions occur when fund is set up and when being replenished - To manage cash efficiently, companies sometimes ○ Delay paying suppliers ○ Speed up collection from customers ○ Try to earn best return possible on excess cash