ACC 550 WSU EXAM 1 STUDY GUIDE
Internal Control - Answers - A company's policies and procedures designed to reduce
the opportunity for fraud and to provide reasonable assurance that its objectives will be
accomplished
Sarbanes-Oxley Act of 2002 (SOX) - Answers - SOX requires public companies to
evaluate their internal control and to publish those findings with their SEC filings.
Section 404 requires a statement of management's responsibility for establishing and
maintaining adequate internal control over financial reporting by public companies.
What five interrelated components does SOX assess a company's controls by? -
Answers - 1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and Communication
5. Monitoring
Separation of Duties (Internal Control) - Answers - Internal Control feature of assigning
the functions of authorization, recording, and custody to different individuals.
Bonded Employees (Internal Control) - Answers - Insurance policy that a company buys
to insure itself against loss due to employee dishonesty.
Required Absences (Internal Control) - Answers - Employees should be required to take
regular vacations and their duties should be rotated periodically.
Procedures Manual (Internal Control) - Answers - Appropriate accounting procedures
should be documented in a procedures manual.
Authority and Responsibility (Internal Control) - Answers - A document that outlines the
chain of command for authority and responsibility. The authority manual provides
guidelines for specific positions such as personnel officer as well as general authority,
such as all VPs are authorized to spend up to a designated limit.
Prenumbered Documents (Internal Control) - Answers - Companies can keep a record
of their check numbers to see if numbers ever go missing and to avoid the unauthorized
use of their bank accounts. Prenumbered forms are used for all important documents
such as purchase orders, receiving reports, invoices, and checks. Documents should
also allow for authorized signatures.
Physical Control (Internal Control) - Answers - Companies should establish adequate
physical control over valuable assets.
, Performance Evaluations (Internal Control) - Answers - Internal Controls should include
independent verification of employee performance as few people can evaluate their
performance objectively.
What are the limitations of internal control activities? - Answers - - Collusion among
employees
- Management override
- Human Error
10 features of an internal control system - Answers - 1. Separation of Duties
2. Hiring and Training competent employees
3. Bonding employees to recover losses through insurance
4. Requiring employees take vacations
5. Establishing proper procedures for processing transactions
6. Establish clear lines of authority/responsibility
7. Use prenumbered documents
8. Physical Controls
9. Conducting performance evaluations through independent internal and external
audits
10. No control system is foolproof!!
What does the term cash, include? - Answers - Items that are payable on demand, i.e.
checks, money orders, bank drafts, and certain saving accounts
- Saving accounts that impose substantial penalties for early with-drawl are considered
investments, not cash
- Postdated checks and IOUs are considered receivables and are not included in cash
What internal controls should be used for handling cash? - Answers - Cash Receipts
(employees who receive cash should give customers a copy of a written receipt)
Cash Payments (A company should make all disbursements using checks, thereby
providing a record of cash payments. Checks should be prenumbered and unused
checks should be locked up)
What are the 4 main types of Checking Account Documents? - Answers - 1. Signature
Card (Bank form that records the bank account number and signatures of the people
authorized to write checks on an account)
2. Deposit Ticket (Bank form that accompanies checks and cash deposited into a bank
account; normally specifies the account number, name of the account, and a record of
the checks and cash being deposited)
3. Bank Checks (Prenumbered forms with the name of the business issuing them
preprinted on the face, indicating to whom they are paid, the amount of the payment,
and the transaction date)
Internal Control - Answers - A company's policies and procedures designed to reduce
the opportunity for fraud and to provide reasonable assurance that its objectives will be
accomplished
Sarbanes-Oxley Act of 2002 (SOX) - Answers - SOX requires public companies to
evaluate their internal control and to publish those findings with their SEC filings.
Section 404 requires a statement of management's responsibility for establishing and
maintaining adequate internal control over financial reporting by public companies.
What five interrelated components does SOX assess a company's controls by? -
Answers - 1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and Communication
5. Monitoring
Separation of Duties (Internal Control) - Answers - Internal Control feature of assigning
the functions of authorization, recording, and custody to different individuals.
Bonded Employees (Internal Control) - Answers - Insurance policy that a company buys
to insure itself against loss due to employee dishonesty.
Required Absences (Internal Control) - Answers - Employees should be required to take
regular vacations and their duties should be rotated periodically.
Procedures Manual (Internal Control) - Answers - Appropriate accounting procedures
should be documented in a procedures manual.
Authority and Responsibility (Internal Control) - Answers - A document that outlines the
chain of command for authority and responsibility. The authority manual provides
guidelines for specific positions such as personnel officer as well as general authority,
such as all VPs are authorized to spend up to a designated limit.
Prenumbered Documents (Internal Control) - Answers - Companies can keep a record
of their check numbers to see if numbers ever go missing and to avoid the unauthorized
use of their bank accounts. Prenumbered forms are used for all important documents
such as purchase orders, receiving reports, invoices, and checks. Documents should
also allow for authorized signatures.
Physical Control (Internal Control) - Answers - Companies should establish adequate
physical control over valuable assets.
, Performance Evaluations (Internal Control) - Answers - Internal Controls should include
independent verification of employee performance as few people can evaluate their
performance objectively.
What are the limitations of internal control activities? - Answers - - Collusion among
employees
- Management override
- Human Error
10 features of an internal control system - Answers - 1. Separation of Duties
2. Hiring and Training competent employees
3. Bonding employees to recover losses through insurance
4. Requiring employees take vacations
5. Establishing proper procedures for processing transactions
6. Establish clear lines of authority/responsibility
7. Use prenumbered documents
8. Physical Controls
9. Conducting performance evaluations through independent internal and external
audits
10. No control system is foolproof!!
What does the term cash, include? - Answers - Items that are payable on demand, i.e.
checks, money orders, bank drafts, and certain saving accounts
- Saving accounts that impose substantial penalties for early with-drawl are considered
investments, not cash
- Postdated checks and IOUs are considered receivables and are not included in cash
What internal controls should be used for handling cash? - Answers - Cash Receipts
(employees who receive cash should give customers a copy of a written receipt)
Cash Payments (A company should make all disbursements using checks, thereby
providing a record of cash payments. Checks should be prenumbered and unused
checks should be locked up)
What are the 4 main types of Checking Account Documents? - Answers - 1. Signature
Card (Bank form that records the bank account number and signatures of the people
authorized to write checks on an account)
2. Deposit Ticket (Bank form that accompanies checks and cash deposited into a bank
account; normally specifies the account number, name of the account, and a record of
the checks and cash being deposited)
3. Bank Checks (Prenumbered forms with the name of the business issuing them
preprinted on the face, indicating to whom they are paid, the amount of the payment,
and the transaction date)
