ACCT 201 Lecture Notes - Lecture 7: Bank Reconciliation, Bank Statement, Internal Control

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ACCT 201 – Lecture 7 – Chapter 4

Chapter 4

Internal Control

oInternal Control Definition

1. The safeguarding of assets

2. Improving the accuracy and reliability of accounting records

oSOX – Sarbanes Oxley (Act)

1. Requires that all companies that are publicly traded are subject to SEC

regulations

2. Requires management documentation and assessment of internal

controls

3. Audit committee, part of the board of directors, are the ones that hire

auditors

Auditors can be can be both external (not from the company) or

internal (from the company)

Component/Limitations of internal control

oComponents of internal control include:

1. Control environment – “tone at the top”

Basically, organization follows the example of the top

management, so if top management is unethical, lower members

may also be unethical

2. Risk Assessment – Internal and external

Determine weaknesses in order to decide what needs to have

stronger security

3. Control activities – Safeguarding assets

2 Categories: Preventive and Detective

oPreventive

Separation of duties – recorder keeping should not

have the physical custody of assets

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Physical controls – Locks, safes, physical objects of

security

Proper authorization – i.e. customer service desk at

a retail store to accept returns by using receipts

Employee Management – Training; employees

need to know what to do

E-commerce controls -using a password to login to

computer

oDetective

Reconciliation – i.e. bank reconciliation (bank

statement to accounting records)

Performance review – individual or whole company

review

Audits – Someone checking records and operations

of a company

4. Monitoring – keeping an eye on things

5. Information and communication

oLimitations of internal control include:

1. Human error

2. Overrides – “I know that’s the rules, but don’t worry about it!”

3. Collusion – people getting together planning to break rules for personal

gain

4. Fraud Triangle:

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Cash Receipts and disbursements

1. All preventative controls apply to cash

Bank Reconciliation

1. Compare general ledger cash to bank statement cash

2. 2 reasons for differences in cash between the two:

Timing

Errors

3. Always do bank reconciliation at the end of a period (usually the month)

4. So who’s “wrong”?

To correct the differences, do we have to add or subtract?

5. Timing examples:

We deposit at 9PM on the last day of the month and the bank does not

get this until the next day

Bank statement is wrong, must add the deposit to bank statement

Bank charges a service fee

Company is wrong, must subtract service fee from general ledger

Setting up a bank reconciliation

1. Set up form:

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Document Summary

Acct 201 lecture 7 chapter 4. Internal control: internal control definition, the safeguarding of assets. Auditors can be can be both external (not from the company) or internal (from the company) Component/limitations of internal control: components of internal control include, control environment tone at the top . Basically, organization follows the example of the top management, so if top management is unethical, lower members may also be unethical: risk assessment internal and external. Determine weaknesses in order to decide what needs to have stronger security: control activities safeguarding assets. Separation of duties recorder keeping should not have the physical custody of assets. Physical controls locks, safes, physical objects of security. Proper authorization i. e. customer service desk at a retail store to accept returns by using receipts. Employee management training; employees need to know what to do. E-commerce controls -using a password to login to computer: detective. Reconciliation i. e. bank reconciliation (bank statement to accounting records)

Related Questions

Colorado Springs Company (CSC) is a wholesaler with fiscal year ended December 31 of previous year. Since it is publicly-traded, it undergoes external audit. The most recent audit was completed in February of this year. As part of the audit of the financial statements, the auditors tested the effectiveness of managementâs assessment of internal control over financial reporting. The auditor found out that existing internal controls were inadequate. Specifically, CSCâs accounting system for sales, cash receipts, accounts receivables, and accounts payable had material weakness. The audit revealed that there were:

Poor accounting system of recording keeping

Late deposits of cash receipts

Excessive aged and high accounts receivable balances

Disregard for early payments for discounts on invoices

Late payments of accounts payable (sometimes due to lack of cash)

Lax appropriate segregation of duties

Relaxed rules on accounting principlesâ application

Unqualified supervisor and management

Inadequate control on supervisor and management overrides

Lax oversight by external board of directors

1) For each finding above, indicate internal control principle that CSC violated.

2) For each finding above, provide an appropriate recommendation for CSC to correct the weakness.

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True or False:

An advantage of FIFO is that it assigns the most recent costs to cost of goods sold, and does a better job of matching current costs with revenues on the income statement.

A properly designed internal control system is a key part of systems design, analysis, and performance.

An internal control system consists of the policies and procedures companies use to protect assets, ensure reliable accounting, promote efficient operations, and uphold company policies.

Technologically advanced accounting systems rarely need monitoring for errors because computers always process transactions correctly.

Separation of duties involves dividing responsibility for a transaction or a series of related transactions between two or more individuals or departments.

The Sarbanes-Oxley Act (SOX) requires managers and auditors of companies whose stock is traded on an exchange to document and certify the system of internal controls.

A receivable is an amount due from another party.

Credit sales are recorded by crediting Accounts Receivable.

The accounts receivable turnover indicates how often accounts receivable are received and collected during the period.

A high accounts receivable turnover in comparison with competitors suggests that the firm should tighten its credit policy.

The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible.

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4)Managers place a high priority on internal control systems because the systems assistmanagers in all of the following except:

A)Protecting assets.

B)Urging adherence to company policies.

C)Promoting efficient operations.

D)Ensuring reliable accounting.

E)Assuring that no loss will occur.

5)A properly designed internal control system:

A)Insures profitable operations.

B)Eliminates the need for an audit.

C)Is not necessary if the company uses a computerized system.

D)Requires the use of non-computerized systems.

E)Lowers the company's risk of loss.

6)A company's internal control system:

A)Eliminates the need for audits.

B)Eliminates the need for managers' certification of controls.

C)Monitors company and employee performance.

D)Eliminates human error.

E)Eliminates the company's risk of loss.

7)The impact of technology on internal controls includes:

A)Elimination of fraud.

B)Elimination of the need to bond employees.

C)Reduced processing errors.

D)Elimination of separation of duties.

E)Elimination of the need for regular audits.

8)Internal control systems are:

A)Required only if a company plans to engage in interstate commerce.

B)Developed by the Internal Revenue Service for all U.S. companies.

C)Required by Sarbanes-Oxley (SOX) to be documented and certified if the

company's stock is traded on an exchange.

D)Developed by the Securities and Exchange Commission for public companies.

E)Developed by the Small Business Administration for non-public companies.

9)Cash equivalents:

A)Include 6-month certificates of deposit.

B)Are short-term, highly liquid investment assets.

C)Include money orders.

D)Include checking accounts.

E)Are recorded in petty cash.

10)Cash equivalents meet all of the following criteria except:

A)Include short-term investments purchased within 3 months of their maturity

dates.

B)Are readily convertible to a known cash amount.

C)Have a market value that is not sensitive to interest rate changes.

D)Include short-term U.S. treasury bills.

E)Are more liquid than cash.

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ACCT 201 Lecture Notes - Lecture 7: Bank Reconciliation, Bank Statement, Internal Control

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