accounting notes 3-22-08

accounting notes 3-22-08 - CHAPTER 5: ENSURING THE...

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CHAPTER 5: ENSURING THE INTEGRITY OF FINANCIAL INFORMATION 1. The Types of Problems That Can Occur o The financial reports for most companies are accurate. Inaccurate financial reports can result from any one of the following: Unintentional errors Disagreements in judgment Fraud 2. Safeguards Designed to Minimize Problems o Most organizations have an internal control system that, among other things, helps ensure integrity in financial reports. The various elements of control that relate to financial reporting are summarized as follows. o Control Environment 1. Management philosophy and operating style 2. Organizational structure 3. Audit committee o Control Activities (Procedures) 1. Segregation of duties (preventative control) 2. Proper procedures for authorization (preventative control) 3. Physical control over assets and records (preventative control) 4. Adequate documents and records (detective control) 5. Independent checks on performance (detective control) 5. The Role of Auditors in the Accounting Process o Auditors provide a check and balance to ensure that the financial statements fairly reflect the financial performance of a business. o Internal auditors ensure integrity in the financial records and evaluate and encourage adherence to the organization’s internal controls.
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o External certified public accountants ensure the integrity in the financial reporting process with independent audits of financial statements. o Independent financial statement audits are required for all public companies, and often by creditors and other users.
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1. Major Activities of a Business o Operating activities involve selling products or services, buying inventory for resale, and incurring and paying for necessary expenses associated with the primary activities of a business. o Investing activities include purchasing assets for use in the business and making investments in such items as stocks and bonds. o Financing activities include raising money to finance a business by means other than operations. 2. Recognizing Revenue o Revenue is recognized after: The work is done and Cash collectability is reasonably assured o The entry to record revenue from the sale of merchandise or from the performance of a service is: Cash (and/or Accounts Receivable)……………………… XXX Sales Revenue (or Service Revenue)……………. . XXX 3. Cash Collection o Net sales can be calculated as follows: Gross Sales Sales Discounts Sales Returns and Allowances = Net Sales o Common cash controls include: Separation of duties in handling and accounting for cash, Daily deposits of all cash receipts, and
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This test prep was uploaded on 04/07/2008 for the course MGA 201 taught by Professor Anderson during the Spring '08 term at SUNY Buffalo.

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accounting notes 3-22-08 - CHAPTER 5: ENSURING THE...

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