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Policies and procedures put in place by a company to ensure the reliability of financial reporting, compliance with laws and regulations, and the efficiency and effectiveness of operations.
They help prevent and detect errors or fraud, protect resources, ensure accurate financial reporting, and promote legal compliance.
A U.S. law enacted in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations.
SOX requires companies to establish and maintain internal controls over financial reporting and to have those controls audited, enhancing the reliability of corporate disclosures.
The Committee of Sponsoring Organizations of the Treadway Commission, which provides a model for evaluating internal controls, risk management, governance, and fraud deterrence.
1. Establishing Responsibilities 2. Maintaining Adequate Records 3. Insuring Assets and Bonding Key Employees 4. Separating Recordkeeping from Custody of Assets 5. Dividing Responsibilities for Related Transactions 6. Applying Technological Controls 7. Performing Regular and Independent Reviews
To provide clarity and accountability by assigning specific tasks to individuals.
To verify financial information and facilitate audits by keeping detailed and precise documentation.
To mitigate risk of loss from theft or fraud by protecting the organization's financial interests.
By preventing fraud through mutual oversight and checks among different individuals or teams.
To secure assets and sensitive data while automating controls and reducing human error.
To ensure the effectiveness of internal controls and identify areas for improvement through unbiased audits.
The cashier is solely responsible for managing cash receipts. Why is this effective? Answer: It establishes clear accountability and reduces the risk of cash handling errors.
All sales transactions are recorded electronically with a timestamp. Why is this practice important? Answer: It provides a verifiable record, essential for audits and financial integrity.
A company insures its inventory and bonds employees who handle the finances. How does this protect the company? Answer: It mitigates financial loss from theft or fraud.
The accountant records transactions while a separate clerk handles the cash register. What problem does this prevent? Answer: It prevents the same person from embezzling funds and covering it up in the records.
One employee processes orders while another approves payments. Why is this division beneficial? Answer: It creates a system of checks and balances to prevent unauthorized transactions.
Implementing firewall and encryption technology for the company's data systems serves what purpose? Answer: It protects against data breaches and supports data integrity.
An external auditor conducts surprise audits. What is the advantage of this approach? Answer: It ensures unbiased evaluation and detection of any irregularities or errors.
A framework for understanding the factors that lead individuals to commit fraud: opportunity, pressure, and rationalization.
An employee has unrestricted access to the cash register without oversight. How does this create opportunity? Answer: It provides a chance to misappropriate funds with a low perceived risk of detection.
An employee is facing financial difficulties due to debt. How does this relate to fraud? Answer: It creates a personal financial pressure that could motivate the employee to steal from the company.
An employee believes they're underpaid and deserves more. How might this lead to fraud? Answer: The employee justifies fraudulent actions by convincing themselves that it is a form of compensation they're owed.
What internal control can reduce the opportunity for fraud? Answer: Implementing segregation of duties and regular audits can reduce the chances for fraud to occur.
How can a company alleviate pressure that might lead to fraud? Answer: Offering employee support programs and fair compensation can help reduce personal pressures that may lead to fraudulent behavior.
What steps can a company take to prevent rationalization of fraud? Answer: Establishing a strong ethical culture and clear consequences for fraudulent actions can deter employees from justifying fraud.
A process for matching the company's cash account balance with the bank statement balance.
It verifies the accuracy of the bank's and the company's records, ensuring that cash transactions are correctly recorded and preventing or detecting discrepancies or fraud.
To identify discrepancies between the bank statement and the company's records to ensure accurate cash balances.
The cash balance according to the bank's records at a given point in time.
The cash balance according to the company's ledger at a given point in time.
Adjust both bank and book balances for deposits in transit, outstanding checks, and any errors or unrecognized transactions.
Reflect transactions recorded by the company but not yet by the bank, like deposits in transit and outstanding checks.
Record transactions recognized by the bank but not yet by the company, like bank fees or interest.
No journal entries required; adjustments reflect the bank's actions to be captured in the company's books.
Required to update the company's cash account and reflect transactions processed by the bank.
Cash or checks received by a company not yet recorded by the bank.
Checks issued by the company that have not yet been cashed or cleared by the bank.
Mistakes made by the bank when recording deposits into a company's account.
Mistakes made by the bank when recording withdrawals from a company's account.
Fees charged by the bank for various services, not yet recorded by the company.
Checks that are returned by the bank due to insufficient funds in the payer's account.
They are added to the bank side balance.
They are deducted from the bank side balance.
Add or subtract on the bank side, depending on whether the error was an under or over deposit.
Add or subtract on the bank side, depending on whether the error was an under or over withdrawal.
They are deducted from the book balance.
They are deducted from the book balance.
Both the check amount and the fee are deducted from the book balance.
No, because it's a bank side adjustment.
No, because it's a bank side adjustment.
No, because they are the bank's responsibility to correct.
Increases the reconciled bank balance to reflect actual cash available.
Decreases the reconciled bank balance to reflect checks that have not yet been processed by the bank.
If the bank under-deposited, add to the bank balance. If over-deposited, deduct from the bank balance.
If the bank over-withdrew, add to the bank balance. If under-withdrew, deduct from the bank balance.
If a $1,000 check is deposited on the last day of the month but not reflected on the bank statement, how is it handled? Answer: Add $1,000 to the bank statement balance.
If a $500 check issued to a supplier is not cleared by the month-end, how is it handled? Answer: Deduct $500 from the bank statement balance.
If the bank recorded a $200 deposit as $2,000, what adjustment is made? Answer: Deduct $1,800 from the bank statement balance.
If the bank debited an account for $1,000 instead of the correct $100 for a service payment, what adjustment is made? Answer: Add $900 to the bank statement balance.
Because the charges decrease the company's cash and must be recorded in the company's books.
It decreases because the previously recorded cash receipt is reversed.
To accurately record the reversal of the check amount and the expense of the bank fee.
To ensure that the company's financial statements accurately reflect its financial position and performance.
Identify the error, write out the incorrect entry, write the correct entry, and then record the necessary adjustment to fix it.
If an expense is understated, the correction involves debiting the expense account and crediting cash.
For an overstated expense, the correction requires debiting cash and crediting the expense account.
A bank is crediting their own cash to deposit into your account. Cash is an asset (+/-), so they credit (reduce) their cash to put it into your account! This is common with a savings account, where interest is added every month.
A bank is debiting their own cash when they take money from your account and add it to theirs! Cash is an asset (+/-), so they debit (increase) their cash to remove it from your account! This is common if you take out a loan or line of credit, where interest is deducted every month.
A check for $321 was processed correctly by the bank. The company recorded this purchase for advertising expense incorrectly in the amount of $231. 3 Step Process for Correcting Book Side Errors:
The correct amount that should have been recorded was $321. This means the company underreported its expense by $90 ($321 - $231 = $90). To correct the error, we need to increase the advertising expense by the difference, which is $90. This is done by debiting the Advertising Expense account. Since this expense was paid in cash, we'll also need to credit the Cash account by the same amount to show a reduction in cash. The reason we're debiting Advertising Expense and crediting Cash is to reflect the additional cash outflow of $90 that wasn't captured initially.
A check for $231 was processed correctly by the bank. The company recorded this purchase for advertising expense incorrectly in the amount of $321. 3 Step Process for Correcting Book Side Errors:
In contrast to the previous example, here the company overrecorded its advertising expense by $90. To correct this, we need to decrease the advertising expense by the difference of $90. This is done by crediting the Advertising Expense account. Simultaneously, since the company initially reported an excessive cash outflow, we'll need to debit the Cash account by $90 to show an increase in the cash balance. This restores the Cash account to its correct position by reflecting the overrecorded cash outflow that did not actually take place.
To handle minor business expenses conveniently on-site without writing checks.
- STEP 1: Determine the “replenishment” amount. Subtract the remaining balance ($45) from the initial fund amount ($125). The result, $80, is how much you need to replenish. This amount is credited to the cash account, indicating payment into the Petty Cash fund.
- STEP 2: Record the expenses. Debit each expense category with the corresponding amount.
- STEP 3: Ensure total debits (expenses) match the credit (cash). If they don't align, your Petty Cash might have discrepancies (shortages or overages). In this example, they match, so there are no short or over amounts in the fund.
- STEP 1: Determine the “replenishment” amount. Subtract the remaining balance ($45) from the initial fund amount ($125). The result, $80, is how much you need to replenish. This amount is credited to the cash account, indicating payment into the Petty Cash fund.
- STEP 2: Record the expenses. Debit each expense category with the corresponding amount.
- STEP 3: Ensure total debits (expenses) match the credit (cash). If they don't align, your Petty Cash might have discrepancies (shortages or overages). In this case, a $10 discrepancy was found between expected and actual amounts, which is reflected under "Cash Short & Over”
- HINT: If you need a CREDIT to Cash Short & Over in your entry, it always means your Petty Cash fund was OVER.
- Why? If you had $125 originally in the fund. And you spent a total of $80 on expenses — you should’ve had $45 remaining. Since you had $55 remaining instead, this means your fund was over by $10.
- STEP 1: Determine the “replenishment” amount. Subtract the remaining balance ($45) from the initial fund amount ($125). The result, $80, is how much you need to replenish. This amount is credited to the cash account, indicating payment into the Petty Cash fund.
- STEP 2: Record the expenses. Debit each expense category with the corresponding amount.
- STEP 3: Ensure total debits (expenses) match the credit (cash). If they don't align, your Petty Cash might have discrepancies (shortages or overages). In this case, a $10 discrepancy was found between expected and actual amounts, which is reflected under "Cash Short & Over”
- HINT: If you need a DEBIT to Cash Short & Over in your entry, it always means your Petty Cash fund was SHORT.
- Why? If you had $125 originally in the fund. And you spent a total of $80 on expenses — you should’ve had $45 remaining. Since you only had $35 remaining instead, this means your fund was short by $10.
A digital system for transferring funds between accounts without physical exchange of cash or checks.
Implementing policies and procedures for handling, using, and recording cash to prevent theft, fraud, and errors.
They represent the most liquid assets a company has, critical for short-term obligations and operational needs.
By ensuring that current assets can cover current liabilities, indicating a company's financial health.
Include cash flow forecasting, investment management, and optimizing cash usage to maintain sufficient liquidity.
Record and deposit cash payments promptly to prevent misappropriation and maintain accurate records.
An account for recording discrepancies in cash transactions, indicating potential errors or theft.
To authorize and document legitimate transactions and payments, providing evidence for financial controls.
A document detailing a transaction, used to support payment of a liability and ensure proper recording.
In a voucher system, this is a form requesting the procurement of items or services, initiating the voucher system process.
In a voucher system, this is a formal agreement to buy products or services from a vendor, specifying terms and conditions.
In a voucher system, this is a confirmation of goods or services received, noting condition and quantity, used to verify purchases.
In a voucher system, this is a bill from the vendor detailing the amount due and listing the goods or services provided.
In a voucher system, this is about matching the invoice with the purchase order and receiving report to ensure accuracy before payment.
In a voucher system, this is about preparing and approving payment to settle liabilities once all voucher documentation is verified.
In a voucher system, this is about recording each voucher and its supporting documents in the accounting system for audit trails and financial control.
