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Financial accounting 1: short summary for final exam
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FA short summary final examCH7
Fraud example: diverting money to personal bank, shipping merchandise to yourself,
embezzlement, fake rides, bonus receivements
Fraud occurs because of
1. opportunity
2. financial pressure
3. rationalization
Internal control: process designed to provide reasonable assurance regarding the
achievement of company objectives related to operations, reporting, and compliance
Purpose internal control:
1. safeguard assets
2. enhance reliability of accounting records
3. increase efficiency of operations
3. ensure compliance with laws and regulations
5 primary components of internal control system:
1. a control environment
2. risk assessment
3. control activities: policies and procedures to address specific risks faced by the company
(company’s backbone!)
4. information and communication
5. monitoring
6 principles of control activities
1. establishment of responsibility
- Most effective when one person responsible
- Requires limited access to authorized personnel and identification of them
2. segregation of duties
- Two common applications: different individuals should be responsible for related
activities, and the responsibility for recordkeeping for asset should be separate from
physical custody of that asset
- Making 1 individual responsible for all rel. activities increases potential for errors
o Purchasing activities: assign related purchase Activities to different individuals, because
fraud is possible when one person handles related purchasing activities.
- Includes: ordering merchandize, approving orders, receiving goods, authorizing
payment, and paying for goods or services
o Sales activities: assign related sales activities to different individuals because fraud possible
when one person handles related sales activities
- Includes: making a sale, shipping(delivering) goods to customers, billing customer,
receiving payment
- Accountants should have neither physical/access of asset, custodian not access to
accounting records less likely to convert to personal use
- Cash and inventory are vulnerable to fraud (because cash readily convertible into any
other type of asset, easily concealed and transported, highly desired)
3. documentation procedures
- Documents provide evidence transactions/events
- Document trasnactions when they occur (signature important for identification)
- Companies should establish procedures for documents: use prenumbered documents
and all to be accounted for (helps to prevent to record transaction more than once), and
forward source documents for accounting entries to accounting department (ensures
timely recording transaction + contributes to accuracy and reliability
, 4. physical controls
- To safeguard an asset and enhance accuracy/reliability accounting records
- Examples: saves/vaults, locked warehouse, passkey acces, fingerprint, alarms, television
monitors, garment sensors, time clocks for recording time worked
5. independent internal verification
- Involves review of data by employees
- To obtain max. benefit from this principle: verify records periodically/surpise basis,
employee who is independent of personnel responsible for information should make
verification, discrepancies (tegenstrijdig) should be reported to management level than
can take action
- Useful in comparing records accountability with existing assets
- Examples: reconciliation cash balance. Verification perpetual inventory records through
count of physical inventory
- Internal auditor: company employees who continuously evaluate effectiveness of the
company’s internal control systems (review depart/indiv. Activities to determine if
internal controls are being followed, also recommend improvements.
6. human resource controls
- Includes:
1. bond employees who handle cash
- Bonding: involves obtaining insurance protection against theft by employees.
- Screening individuals, bond employees know that insurance company will prosecute all
offenders
2. rotate employees’ duties and require employees to take vacations
3. conduct thorough background checks
Limitations of internal control
1. reasonable assurance:
2. human element
3. collusion (can reduce effectiveness)
4. size of business
Over-the-counter receipts:
- Cash register visible to customers
- The system for handling cash receipts uses principle: segregation of record keeping from
physical custody (supervisor only access tape, clerk and cashier only access to cash)
- Three pjnciples that provide effective system control: segregation recordkeeping physical
custody, documentation, independent internal verification
- Fraud can be detected, unless there is a collusion between employees
- Cash over and short account (IS): difference between actual caash and amount reported on
cash register rape. miscellaneous expense when shortfall, miscellaneous revenue when
overage.
This account is used to record unexplained differences.
- Use the following entry for cash over and short:
DEBIT: Cash, Cash Over and Short,
CREDIT: Sales Revenue (to record cash shortfall)
Mail receipts
- Opened in presence of min 2 mail clerks reduces fraud
- Mail clerks prepare list of checks each day: name check issuer, purpose payment, amount of
check send original copy list and check to cashier dep. and acc.
- Cashier access to cash but not to records, acc. Dep. access to records, not cash neither
can engage in undetected fraud
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