Term
| What three things must be present for a fraudster to set to work? |
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Definition
1. The opportunity to commit fraud.
2. The incentive to commit fraud.
3. The fraudster's ability to rationalize their own actions |
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Term
| A company that is more likely to be victimized by fraud not only lacks sufficient controls to detect fraudulent activities but ... |
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Definition
| also lacks ethics, values, programs and systems that discourage fruad (this includes a well-developed culture that protect employees who expose fraud) |
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Term
| What is the largest type of fraud in corporations today? |
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Definition
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Term
| What is corporate culture? |
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Definition
| The specific collection of values and norms that are shared by people and groups in an organization and that control the way they interact with each other and with stakeholders outside the organization. |
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Term
| What does SOX have to say about internal controls? |
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Definition
| Public companies must issue internal control reports. Independant auditors must evaluate internal controls. They created the PCAOB to oversee the work of auditors of public companies. |
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Term
| What is the most effective in preventing institutional fraud? |
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Definition
| In short, consequences. Stiff penalties and thourough prosecution along with clearly established tone at the top of the organization. |
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Term
| Can accounting firms audit and provide consulting services for the same client? |
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Definition
| No, not usually. There are penalties for violators. |
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Term
| How does SOX protect whistleblowers? |
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Definition
| It says that you can't discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee because the employee has provided information or otherwise assisted in an investigation ... |
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Term
| What do companies do to stay out of whistle-blower trouble? |
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Definition
| Write a corporate code of conduct that encourages reporting, includes a no-retaliation policy, establish a corporate hotline or ethics officer and keep well-documented personnel files, disciplinary records and termination records. |
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Term
| What is Internal Control? |
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Definition
| All policies and procedures used to: safegaurd assets, encourage employees to follow company policy, promote operational efficiency and ensure accurate, reliable accounting records |
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Term
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Definition
| an intentional act that results in a material misstatement in financial statements. |
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Term
| What are two types of fraud (considered by SAS 99) |
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Definition
| Misstatements arising from fraudulent financial reporting and Misstatements arising from misappropriation of assets |
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Term
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Definition
| intangible, difficult to verify, essential controls necessary to run any organization that are to do with ethics and integrity. Management philosophy, integrity and ethics are all examples |
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Term
| What are the elements of Internal Control? |
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Definition
| Control Environment, Risk Assessment, Control Procedures, Control Monitoring, Information Systems |
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Term
| How is separation of duties an internal control? |
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Definition
| It limits fraud, promotes accurate financial statements |
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Term
| How is an audit a principle of internal control? |
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Definition
| It is an examination of a company's financial statements and accounting system. There are internal and external auditors |
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Term
| What is separation of duties? |
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Definition
| Dividing responsibilities for transactions limits the chances for fraud and promotes accuracy of the accounting records. |
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Term
| What are a few examples of seperation of duties? |
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Definition
| Operations from accounting - the entire accounting function should be completely separate from the operating departments. And Custody of assets from accounting - accountants should not have access to assets and those that have access to assets should not have access to the accounting records. |
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Term
| What are a few of the more tangible examples of good internal controls? |
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Definition
| documents and records - prenumbered documents call attention to any missing. Electronic devices and computer controls as well as fireproof vaults, burglar alarms, POS terminals, mandantory vacations, etc. |
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Term
| What IC principles are common to all companies? |
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Definition
| Establishing responsibilities, maintaining adequate records, insuring assets and boding key employees, separate recordkeeping from custody of assets, divide responsibilitiy for related transactions, apply technological controls, preform regular and independant reviews. |
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Term
| What are some of the pitfalls of e-commerce? |
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Definition
| Phishing, stolen credit card numbers, computer viruses, etc. Some security measures against these: encryption, firewalls |
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Term
| How does technology effect internal control? |
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Definition
| More extensive testing of records, crucual separation of duties, increased e-commerce, limited evidence of processing, reduced processing errors |
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Term
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Definition
| when two or more employees work together to defraud a company. |
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Term
| What is good cash management practices? |
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Definition
| Plan cash receipts to meet cash payments when due, keep a minimum level of cash necessary to operate. |
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Term
| What are examples of effective cash management? |
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Definition
| encourage collection of receivables, delay payment of liabilities, keep only necessary levels of assets, plan expenditures, invest excess cash |
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Term
| What are some controls on a bank account? |
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Definition
| Signature cards - ensure that only an authorized person has access. Deposit tickets maintain a record of amounts deposited. |
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Term
| Checks - how are they useful and explain the parts |
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Definition
| they maintain a record of monies withdrawn from the bank. They include the date, the name of the payee and the sigure of the maker |
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Term
| What do bank statements tell us? |
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Definition
| The monthly activity in an account. For instance, canceled checks, which have cleared the bank and electronic funds transfers |
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Term
| What are a few things that would be included on a bank reconsiliation? |
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Definition
| deposits in transit, outstanding checks, book errors, eft's, service charges, NSF checks, interest revenue, check printing/service charges, bank errors |
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Term
| What is bank reconciliation? |
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Definition
| Explains all the differences between general ledger cash accounts and bank statement cash balance. They key is: Which ones don't you know about? |
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Term
| On the bank reconciliation, what are you including? |
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Definition
| The bank statement and what the bank knows (i.e. what you don't know) and the book balance or what you know (i.e. what your bank doesn't know) you add or deduct these things accordingly and then adjust each balance |
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Term
| What is the useful rule of thumb for bank recs? |
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Definition
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Term
| When you finish a bank rec and compare the adjusted balances what should you see? |
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Definition
| They should be equal. If not, do it again. The balance should be the true, correct amount of cash as of that date. |
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Term
| After you do a bank rec how do you journalize it? |
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Definition
| If you have to increase the cash you will debit cash and credit another account. If you are decreaseing the cash you will credit cash and debit another account |
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Term
| What is the accounting use and method for cash reciepts over the counter? |
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Definition
| A receipt is issued for each transaction, the drawar opens at the time of transaction. At the end of the shift, the manager proves cash by comparing the cash to the machines record of sales. The cash is deposited and the register tape is sent to accounting. |
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Term
| How are cash receipts by mail handled? |
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Definition
| Incoming mail is opened by a mailroom employee, this person compares the check received with the remittance advice, receipts sent to reasurer and casheir deposits money, remittance advice sent to accounting for journal entries and controller compares records of the day bank deposit vs. debit to cash from accounting |
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Term
| How does the voucher system for handling cash work? |
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Definition
| A voucher is a document authorizing a cash payment. The voucher register is similar to a purchases journal. The check register is similar to a cash payments journal |
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Term
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Definition
| Cash fund kept on hand to pay for small expenditures. Someone is designated a custodian for petty cash and you keep a specific amount on hand. All fund payments are supported with a petty cash ticket. |
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Term
| How do you replinish petty cash? |
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Definition
| Using the information from the vouchers, record expenses in journal. A new check is cashed for the total amount of expenses and cash is placed in the cash box. |
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Term
| What is cash short and over? |
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Definition
| A temporary account used whenever cash fund is short or over. May have either a debit or credit balance and is reported as miscellaneious expense or revenue depending on ending balance. Closed at the end of the accounting period to income summary |
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Term
| When does "earnings management" occur? |
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Definition
| When managers use judgement in financial reporting and structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of a company or to influence contractual outcomes that depend on reported accounting numbers. |
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Term
| Earnings management usuall involves aggressive accounting tactics to ... |
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Definition
| artificially increase or decrease revenues, profits, or earnings per share. This is a form of fraud and differs from reporting error. |
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Term
| Is there such a thing as a single "right" earnings figure? |
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Definition
| No, that is where the difficulty lies. It is recognized that it is possible for legitimate business practices to develop into unacceptable financial reporting. |
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Term
| Is there such a thing as a single "right" earnings figure? |
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Definition
| No, that is where the difficulty lies. It is recognized that it is possible for legitimate business practices to develop into unacceptable financial reporting. |
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Term
| What are the main forms of earnings management? |
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Definition
| Unsuitable revenue recognition, inappopriate accruals and estimates of liabilities, excessive provisions and generous reserve accounting, intentional minor breaches of financial reporting requirements that aggregate to a material breach. |
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Term
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Definition
| monetary claims against businesses and individuals. These claims arise from selling goods or services on credit or from lending money. Each credit transaction involves a creditor who sells something and obtains a receivable, and a debtor who makes the purchase and has a payable. |
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Term
| What is the difference between an accounts receivable and a notes receivable? |
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Definition
| Accounts Receivable is current while notes receivable is current or long-term depending on when the note matures |
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Term
| An accounts receivable represents an .. |
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Definition
| amount due from a customer for goods or services sold. It is classified as a current asset on the balance sheet and a subsidiary ledger includes a separate account for each customer. |
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Term
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Definition
| a written promise to receive cash and is more formal than an AR. It is either current or long-term, depending on maturity date and may include loans to employees or subsidiary companies. |
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Term
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Definition
| a negotiable document that serves as evidence of a note receivable |
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Term
| Receivables should be reported how? |
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Definition
| On the balance sheet, at the amount the company expects to collect (net realizable value). And on the income statement the expense associated with the failure to collect would be reported (uncollectible accounts expense) |
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Term
| What is net realizable value? |
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Definition
| The amount a company actually expects to collect on a receivable |
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Term
| What is the income statement account associated with bad receivables? |
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Definition
| Uncollectible accounts expense |
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Term
| What happens on both the retail and client side of a credit card sale? |
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Definition
| The retailer receives cash almost imediately for the sale while the customer receives a monthly bill for the the amoount they spent and writes just one check for the statement balance |
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Term
| How does a debit-card sale differ from a credit card sale? |
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Definition
| Does not require a third party, the buyer uses the card and his or her bank cash account is immediately decreased and the vendor's bank cash is immediately increased. |
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Term
| How does the banking end of credit card sales work? |
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Definition
| The seller deposits the cc sales receipt and the bank increases the balance in the companies checking account. There is usually a 1-5% fee for the service. |
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Term
| What are the retailer benefits of providing credit card sales? |
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Definition
| Customers credit is evaluated by the credit card issuer, sales are increased by providing purchase options, the risk of extending credit are transferred to the issuer and cash collections are quicker. |
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Term
| What is the journal entry for a retailer when they make a credit card sale? |
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Definition
| Debit AR - Visa, credit CC Discount expense and sales revenue. |
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Term
| What is the journal entry when the retailer collects the discounted amount of a sale transaction? |
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Definition
| debit to cash, credit to AR - Visa |
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Term
| What is the journal entry when a bankcard is used? |
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Definition
| Debit cash, credit bankcard discount expense and sales revenue |
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Term
| When do you record the cash receipt of a credit card sale? |
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Definition
| When you actually receive that cash |
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Term
| What are the steps of credit control for a company? |
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Definition
| Establish a credit department who evaluates customers for credit worthiness and pursues collection from customers. This department should have no access to cash. |
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Term
| What are the pros and cons of selling on credit? |
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Definition
| It creates the benefit of more sales and the cost of some customers not paying. Uncollectible-account expense results from customers not paying. This can also be called doubtful-account expense or bad-debt expense |
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Term
| What are the two methods for recording credit expense? |
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Definition
| The allowance method and the direct write-off method |
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Term
| What is the best method of credit expense to use and why? |
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Definition
| The allowance method because it matches collection losses with revenues in the period in which the sales were made. The direct write-off method fails to match the expense with the sales revenue. |
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Term
| What are the benefits of the loss allowance method? |
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Definition
| Expenses are matched with revenue, A/R reported on balance sheet at the amount of cash expected to be collected |
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Term
| The allowance method of recording uncollectible account expense is based on ... |
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Definition
| estimates of collection losses |
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Term
| Allowance for Uncollectible Accounts or ADA - Allowance of Doubtful Accounts is a ... |
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Definition
| Contra Account, an asset account with a credit balance which represents the estimated amount of collection losses. It is reported on the Income Statement. |
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Term
| How do you find Net Accounts Receivable or the expected collections? |
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Definition
| Accounts Receivable (which is an asset on the balance sheet) minus the contra account ADA = Net AR or the expected collections and net realizable value on the balance sheet |
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Term
| When will the allowance method be put into effect and an adjusting entry be made based on estimates? |
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Definition
| At the end of the fiscal year |
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Term
| What is Net Realizable Value? |
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Definition
| The amount the company actually expects to be collected |
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Term
| What is the journal entry for the adjustment of Allowance for uncollectible accounts? |
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Definition
| A debit to uncollectible accounts expense, an operating expense on the Income statement and a credit to the Allowance for Uncollectible Acounts a contra-asset account on the balance sheet. |
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Term
| What are the two ways to estimate uncollectible account expense? |
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Definition
| Percent of sales and aging of accounts. |
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Term
| Which of the allowance methods is the income statement approach? |
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Definition
| Percent-of-sales because the estimate being made is Uncollectible Accounts Expense. |
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Term
| Which of the allowance method approaches is balance sheet? |
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Definition
| Aging-of-Accounts because the estimate is being made to the contra asset account |
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Term
| Explain the percent-of-sales allowance method approach. |
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Definition
| Also called the income statement approach considers the credit sales fot he period. Focuses on the amount of expense to be reported on the income statement. The percentage used in an historical percentage based on prior uncollectible accounts and past collection experience. To calculate the uncollectible-account expense, the percentage is multiplied by the credit sales. |
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Term
| What is the equation for percent-of-sales method? |
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Definition
| Net credit sales x bad debt % = bad debts expense |
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Term
| Explain the aging-of-accounts allowance method approach. |
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Definition
| Also called the balance-sheet approach, it considers teh age and amount of accounts receivable at the end of the period. Focuses on the amount of net accounts receivalbe to be reported on the balance sheet. |
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Term
| How do you execute the aging-of-accounts method? |
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Definition
| First, the accounts are classified according to the age of the account, then a historical percentage is applied ot each age category. This amount represent the estimated amount of uncollectible accounts from each age catagory, when these amounts are added together, the total is the desired ending balance in the Allowance account. The longer an account goes uncollected, the higher the percentage is applied to it because it is more likely to become bad debt. |
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Term
| How do you record a collection of a debt already written off? |
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Definition
| Reverse the first entry and then record the receipt of cash. Even though you are crediting AR and then immediately debiting it, it is important to show in your records that the account was re-established and then paid off. |
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Term
| When is the direct write-off method used? |
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Definition
| When an account is so deliquent that a company deems it uncollectible. The entry is a debit to uncollectible account expense and a credit to accounts receivable. |
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Term
| What are the issues with the direct write-off method? |
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Definition
| It is defective because it does not set up an allowance for uncollectibles, resulting in a receivable that may be overstated on the balance sheet. It also does not match revenue and uncollectible-account expense. In soem cases, the expense may be recorded ina later period than the revenue. |
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Term
| What are the benefits of the direct write-off method? |
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Definition
| Easy to use and will not create significant distortions in income or assets if collection losses are insignificant |
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Term
| What is interest? What is principal? |
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Definition
| Interest - price paid by a borrower for using a lender's money. Principal is the amount borrowed by the debter. |
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Term
| What is the equation for maturity value? |
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Definition
| principal + interest due at maturity |
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Term
| How is interest calculated? |
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Definition
| It is stated on an annual basis unless specified. The equation is: Principal x rate x time = interest |
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Term
| Identifying a maturity date ... |
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Definition
| it is stated in terms of months or days. Count the exact days or months from the issue date of the note. Start counting on the day following the date of the note. |
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Term
| How would you record a note receivable when disbursed? |
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Definition
| debit to note receivalbe - maker and credit to cash (or sales rev or AR) |
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Term
| When and how would you journal accrued interest on a note? |
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Definition
| At the end of the accounting period and it is a debit to interest receivable and a credit to interest revenue |
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Term
| What is the entry to record collection on the maturity date? |
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Definition
| a debit to cash and a credit to interest revenue and notes receivable |
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Term
| When do you prepare the adjusting entry to record accruing interest revenue? |
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Definition
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Term
| What is discounting/factoring? |
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Definition
| A oompany holding a note receivable may sell the note before its maturity date; this is referred to as discounting a note receivable. They can sell or factor receivables, They may pledge receivables as security for a loan. |
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Term
| What does it mean to default or dishonor a note? |
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Definition
| If it is not paid at maturity, the maker of the note is said to dishonor or default on the note. The payee records interest revenue earned ont he note and debits AR for the full maturity value of the note. |
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Term
| How does a company report receivables? |
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Definition
| Usually, a business reports its accounts receivable at net realizable value and discloses the allowance account paranthetically. Or it can include details in the footnotes. |
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Term
| Acid-Test Ratio ... what is it and how is it done? |
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Definition
| Also called quick ratio, it measures liquidity and measures entity's ability to pay its current liabilities immediately. (cash + short-term investments + net current receivables) / total current liabilities |
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Term
| what is days' sales in receivables? |
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Definition
| Also called "collection period". It measures how many days it takes to collect the average level of receivables. The shorter the collection period, the more quickly the company has cash. |
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Term
| What is the equation for days' sales in receivables? |
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Definition
| one days' sales = net sales / 365 days |
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Term
| What is the equation for days' sales in average accounts receivable? |
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Definition
| average net accounts receivable/one days' sales |
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Term
| what does accounts receivable turnover calculate? |
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Definition
| this ratio provides useful information for evaluating how efficient management has been in granting credit to produce revenue. net sales/ average accounts receivable |
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