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ACIS2115 Chapter 7 Notes 03/16/16

by: Shannon Cummins

ACIS2115 Chapter 7 Notes 03/16/16 ACIS 2115

Shannon Cummins
Virginia Tech
GPA 3.34

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About this Document

These notes cover fraud and its causes. In addition, they touch on the ways that a firm might prevent/detect fraud and how to complete a bank reconciliation. Lastly, it introduces petty cash.
intro to accounting
Class Notes
Fraud, bank, reconciliation, bank reconciliation, petty cash, cash management, internal control, control, Accounting, chapter 7
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This 4 page Class Notes was uploaded by Shannon Cummins on Sunday March 13, 2016. The Class Notes belongs to ACIS 2115 at Virginia Polytechnic Institute and State University taught by in Spring 2015. Since its upload, it has received 19 views. For similar materials see intro to accounting in Accounting at Virginia Polytechnic Institute and State University.

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Date Created: 03/13/16
Chapter 7 Notes: Fraud – a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. Fraud triangle – the three factors that contribute to fraudulent activity by employees: opportunity, financial pressure, and rationalization. To address this, Congress passed the Sarbanes-O1. Opportunity: the most important element. Opportunities occur when the workplace lacks sufficient controls to deter and detect fraud. 2. Financial pressure: employees commit fraud because of personal financial problems or the desire to live a lifestyle not affordable on their salary. 3. Rationalization – employees justify their fraud with excuses that they are underpaid, etc. Sarbanes Oxley Act (SOX) – laws that requires publicly traded companies to maintain adequate systems of internal control. Internal control – a process designed to provide reasonable assurance regarding the achievement of company objectives related to operations, reporting, and compliance. Internal control systems have five primary components:  A control environment. It is the responsibility of top management to make it clear that the organization values integrity and that unethical activity will not be tolerated.  Risk assessment. Companies must identify and analyze the various factors that create risk for the business and must determine how to manage these risks.  Control activities. Management must design policies and procedures to address the specific risks faced by the company. The six principles of control activities are as follows. 1. Establishment of responsibility 2. Segregation of duties 3. Documentation procedures 4. Physical controls 5. Independent internal verification 6. Human resource controls  Information and communication. Must capture and communicate all pertinent information both down and up the organization, as well as communicate information to appropriate external parties.  Monitoring. The adequacy of internal control systems must be monitored periodically. Internal auditors – company employees who continuously evaluate the effectiveness of the company’s internal control systems. Bonding – obtaining insurance protection against theft by employees. Cash receipt controls include over-the-counter receipts and mail receipts. CASH IS THE ASSET MOST SUSCEPTIBLE TO FRAUDULENT  Over-the-counter receipts – standard retail, cash register receipt. The ACTIVITIclerk/cashier has access to the money but not the register tape. The supervisor has access to register tape but not the cash.  Mail receipts – should be opened in the presence of at least two mail clerks; generally in the form of checks. Mail clerks prepare a list of the checks received each day and signs the list, assuming responsibility. Cash disbursements controls include voucher system controls and petty cash funds.  Voucher system – a network of approvals by authorized individuals, acting independently, to ensure that all disbursements by check are proper. o Voucher – an authorization form prepared for each expenditure in a voucher system.  Petty cash fund – a cash fund used to pay relatively small amounts. Two essential steps in establishing a petty cash fund are (1) appointing a petty cash custodian who will be responsible for the fund, and (2) determining the size of the fund. Bank reconciliation – the process of comparing the bank’s balance with the company’s balance, and explaining the differences to make them agree. Electronic funds transfers (EFTs) – a disbursement system that uses wire, telephone, or computer to transfer cash from one location to another. Bank statement – a statement received monthly from the bank that shows the depositor’s bank transactions and balances. REMEMBER, bank statements are prepared from the bank’s perspective; every deposit the bank receives is an increase in the bank’s liabilities (an account payable to the depositor). NSF check (not sufficient funds) – a check that is not paid by a bank because of insufficient funds in a bank account. The need for reconciliation has two causes: 1) time lags that prevent one of the parties from recording the transaction in the same period, 2) errors by either party in recording transactions. Reconciliation procedure: 1. Reconciling items per bank. a. Deposits in transit (+) – deposits recorded by the depositor that have not been recorded by the bank. b. Outstanding checks (-) – issued checks recorded by the company that have not been paid by the bank. c. Bank errors (+/-). 2. Reconciling items per books. a. Other deposits (+). b. Other payments (-). c. Book errors (+/-). Cash equivalents – short term, highly liquid investments that are both readily convertible to known amounts of cash and so near maturity that their market value is relatively insensitive to changes in interest rates. Restricted cash – cash that is not available for general use but rather is restricted for a special purpose. Treasurer – employee responsible for the management of a company’s cash. Basic principles of cash management: 1. Increase the speed of receivables collection. The more quickly a company’s customers pay, the sooner the funds can be used. 2. Keep inventory levels low. Maintaining a large inventory of supplies and finished product ties up large amounts of cash and warehouse space. 3. Monitor payment of liabilities. Using the full payment period (but not paying late) and taking advantages of cash discounts provides the best use of money. 4. Plan the timing of major expenditures. Companies should make any major expenditures when they normally have excess cash. In addition, they should plan ahead to receive prime outside financing. 5. Invest idle cash. Cash on hand does nothing—invest it! Cash budget – a projection of anticipated cash flows, usually over a one- to two-year period.


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