Exam 2 - Chapter 7: Internal Control and Cash Internal...

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Chapter 7: Internal Control and Cash Internal Control o Safeguards on organizations assets from employee theft, robbery, unauthorized use o Enhances the accuracy and reliability of accounting records risk of errors and irregularities 6 Principles of Internal Control o Establishment of responsibility Most effective when only one person is responsible for a given task o Segregation of duties The work of one employee should provide a reliable basis for evaluating the work of another employee Related activities: making one individual responsible for all of the related activities Record keeping separated from physical custody o Documentation procedures Documents provide evidence that transactions and events have occurred o Physical, mechanical, and electronic controls Physical: safes, vaults, locked warehouses, computer passkey access, etc. Mechanical and electronic: alarms, monitors, garments sensors, time clocks o Independent Internal Verification Third person (usually higher up) to check to make sure things are right another internal level of verification o Other Controls Bond employees who handle cash Rotate employees’ duties and require employees to take vacations
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Conduct thorough background checks Cash Control o Internal Controls over Cash Receipts 1) only designated personel are authrorized to handle cash receipts 2) different individuals receive cash, record cash receipts, and hold cash 3)use remittance advice, cash register tapes, and deposit slips 4) store cash in safes and bank vaults 5) supervisors count cash receipts daily 6) bond personnel who handle cash o Internal Control over cash disbursements EFT (Electronic funds transfer ) system Disbursement systems that use wire, telephone or computer to transfer cash Check processing is expensive Limitations of internal control o Cost/benefit: cost of establishing procedure should not exceed expected benefit o Human element: fatigue, carelessness, indifference o Collusion: two or more individuals who work together to get around controls o Size of business Use of Bank o the use of a bank minimizes the amount of currency that must be kept on hand o a “double” record of cash is maintained, one by the company, one by the bank. These two accounts must be reconciled reconciling the bank account o reconciliation
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is necessary as the balance per bank and balance per books are seldom in agreement due to time lags and errors o a bank reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash o steps in preparing a back reconciliation determine deposists in transit determine outstanding checks note any errors discovered trace bank emoranda to the records o each reconciling item used in determining the “adjusted cash balance per books” should be recorded by the depositor with an adjusting entry terms o
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Exam 2 - Chapter 7: Internal Control and Cash Internal...

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