Review of Chapter 3
- What were the steps in the accounting cycle in Chapter 3?
- What is the difference between the accrual and the cash basis of accounting.
- What were the accounting principles?
- What were the 3 types of adjustments?
- What accounts do we close?
- What ratios did we look at?
Question #1:Acompany collected one year of rent in advance onAugust 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) Debit $10,000 Credit $10,000
b) Debit $14,000 Credit $14,000
c) Credit $10,000 Debit $10,000
d) Credit $14,000 Debit $14,000
Internal Control and Cash
Learning Objective 1: Learn about fraud and how much it costs
- Fraud is an intentional misrepresentation of facts, made for the purpose of persuading another
party to act in a way that causes injury or damage to that party.
- It is a huge problem and is getting bigger not only in Canada, but across the globe.
- The two most common types of fraud that impact financial statements are:
1. Misappropriation of assets
2. Fraudulent reporting
Internal Control: Aplan of organization 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 with legal requirements
Sarbanes –OxleyAct (SOX)
- The US congress passed SOX
- SOX is regulated corporate governance in United States
- In March 2004, the Canadian Securities Administrators (CSA) instituted a policy that requires
the CEO and CFO to certify their financial statements
Components of Internal Control:
- Control environment
- Monitoring of controls
- Risk assessment
- Information system
- Control procedures
Internal Control Procedures Smart
1. Smart hiring practices & separation of duties 2. Comparison & Compliance monitoring
3. Adequate reords
4. Limited access
5. Proper approvals
6. Information technology
7. Safeguard controls
1) Smart Hiring and Separation of Duties It
It starts with hiring
•proper training and supervision
•paying competitive salaries
•Responsibilities should be clearly laid out in position descriptions
2) Comparisons and Compliance MonitoringAn
- An audit is an examination by an outside party of the company’s financial statements,
accounting systems, and internal controls.
- An internal auditor is an employee of the business
- An external auditor is an entirely independent of the business
3) Adequate Records -- All major groups of transactions should be supported by either hard copy
documents or electronic records.
4) Limited Access --Company policy should limit access to assets only to those persons or
departments that have custodial responsibilities
5) Proper Approvals-- No transaction should be processed without management’s general or specific
The bigger the transaction, the more specific the approval
6) Information Technology --The basic attributes of internal control of sophisticated IT does not
change but the implementation procedures do.
7) Safeguard Controls
– Fireproof vaults
– Burglar alarms
– Security cameras
– Loss prevention specialist
– Fidelity bonds
– Mandatory vacations
– Job rotation
Encryption • It is the transformation of data by a mathematical process into a form that is unreadable by
anyone who does not have the secret decryption key.
Firewall----It is a technique that limits access to hardware, software, or data to persons within a
The Limitations of Internal Control Systems
- Systems designed to thwart one person’s fraud can be beaten by two or more employees working
together – colluding – to defraud the firm.
- Asystem of internal control that is too complex can hurt efficiency and control.
Question #2: The concept of internal control refers to:
a) Audit procedures used to detect theft
b) Policies of theAccounting Standards Board
c) Policies and procedures of a company designed to safeguard assets