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MGT120H5 (65)
Chapter 4

Lecture 5 - Chapter 4.docx

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University of Toronto Mississauga
Catherine Seguin

Review Chapter 3 Questions What is the difference b/w accrual and cash basis of accounting? • Farmers use cash basis (when cash transaction occurs) , usually accrual based is used (record whether or not cash has been exchanged) What were the accounting principles? • Revenue principle  record revenue when it has been earned and at what amount What were the 3 types of adjustments? • Deferrals, depreciation and accruals What accounts do we close? • REID What ratios do we look at? • Current ratio (can company cover short term debt), debt ratio (can company pay all their debt), profit margin ratio (return on sales) A company collected 1 year of rent in advance on aug 1, 2010. The entry made at that date was a debit to cash and a credit to unearned revenue of 24,000. At dec 31, 2010, the adjusting entry is: Unearned revenue Rent revenue a) DR 10,000 CR 10,000 b) DR 14,000 CR 14,000 c) CR 10,000 DR 10,000 Concept of internal control refers to: a) Audit procedures used to detect theft b) Policies of accounting standards board c) Policies and procedures of a company designed to safeguard assets d) A method used to reconcile the bank statement A cheque was written for $542 to purchase supplies. The cheque was recorded in the journal as $425. The entry to correct the error: a) DR supplies expense, CR Cash $117 b) DR supplies expense, CR Cash $425 c) DR Supplies, CR Cash $117 All of following are objectives of internal control except a) To safeguard assets b) To comply w/ legal requirements c) To maximize net income Internal Control and Cash – chapter 4 Learning objective 1: learn about fraud and how much it costs Fraud: intentional misrepresentation of facts, made of purpose of persuading another party to act in way that causes injury/ damage to that party  problem getting bigger across globe • 2 most common types of fraud that impact financial statements: misappropriation of assets and fraudulent reporting Internal Control: plan of firm and system procedures designed, implemented and maintained by company management and board of directors to deal with risks related to: reliability of financial records and reporting, ability to operate effectively and efficiently, compliance w/ legal requirements Sarbanes – OxleyAct (SOX) • US congress passed SOX  regulated corporate governance in US • In march 2004, Canadian securities administrators (CSA) instituted a policy that requires the CEO and CFO to certify their financial statements Learning Objective 2: set up an internal control system Components of Internal Control: control environment, monitoring of controls, risk assessment(identify risks and how to handle it), information system(make sure info accurate) and control procedures Internal Control Procedures : smart hiring practices and separation of duties, comparison and compliance monitoring, adequate records, limited access, proper approvals, information technology, safeguard controls Smart Hiring and Separation of Duties Hiring: background checks, proper training and supervision, paying competitive salaries Then: responsibilities should be clearly laid out in position descriptions Separation of Duties: assets (cash handling) must be a different person from person who is record keeping separate from transaction approval Comparisons and Compliance Monitoring Audit: examination by outside party of company’s financial statements, accounting systems and internal controls • Managers prepare FS  external auditor examine FS users rely on FS for decision making Internal auditor: employee of business External auditor: entirely independent of business Adequate Records: all major groups of transactions should be supported by either hard copy documents or electronic records LimitedAccess: company policy should limit access to assets only to those persons or departments that have custodial responsibilities ProperApprovals: no transaction should be processed without management’s general or specific approval – the bigger the transaction, the more specific the approval Information Technology: basic attributes of internal control of sophisticated IT does not change but implementation procedures do (certain people have certain access to some things) Safeguard Controls: fireproof vaults, burglar alarms, security cameras, loss prevention specialist, fidelity bonds (insurance on cashiers  if cashier caught stealing, insurance company will pay), mandatory vacations and job rotation Encryption: transformation of data by mathematical process into form that is unreadable by anyone who not have the secret decryption key Firewall: technique that limits access to hardware, software or data to persons within a network Limitations of
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