ACC 111 Module 7 Notes

School: Washtenaw Community College - Course: ACC 111 - Subject: Accounting

WCC ACC 111 MODULE 7 Chapter 7 Notes Internal Controls oInternal Control The organizational plan and all the related measures adopted by an entity to: Safeguard assets. Encourage employees to follow company procedures. Promote operational efficiency. Ensure accurate and reliable accounting records. oCommittee of sponsoring organization A committee that provides thought leadership related to enterprise risk management, internal control, and fraud deterrence. oPublic company A company that sells its stock to the general public. oSOX AKA - Sarbanes-Oxley Act Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial records. Internal control report oA report by management describing its responsibility for and the adequacy of internal controls over financial reporting Public Company Accounting Oversight Board oAKA - PCAOB oOversees the work of public accounting companies. Public Accounting firms are prohibited from providing auditing services and consultation to the same client. 25 years in prison for securities fraud Components of Internal Control o5 components of Internal Control (CRIME) Control Procedures Risk Assessment Information System Monitoring of Controls Environment oInternal Auditor An employee of the business who ensures: the companies employees are following company policies that the company meets all legal requirements Operations are running efficiently. oExternal Auditor An outside accountant who is completely independent of the business

Evaluates the controls to ensure that the financial statements are presented fairly and in accordance with GAAP. Internal Control Procedures oSeparation of Duties Dividing responsibilities between two or more people to limit fraud and promote the accuracy of accounting records. oEncryption Rearranging plain text messages by a mathematical process The primary way of achieving security in e-commerce. Limitations of Internal Control oCollusion Two or more people working together to circumvent internal controls and defraud a company. Cash Receipts and Internal Controls oRemittance Advice Optional attachment to a check. Tells the business the reason for payment oLockbox system A system in which customers send their checks to a post office box that belongs to a bank. Bank employees empty the box daily and record the deposits in the companies bank accounts. Cash Payments and Internal Controls oStreamlined Procedures Evaluated Receipts settlement. AKA - ERS A procedure that compresses the payment approval process into a single step by comparing the receiving report to the purchase order. Electronic Data Interchange AKA - EDI A streamlined process that bypasses paper documents Computers of customers communicate directly with the computers of suppliers to automate routine business transactions. Petty Cash / Cash Transactions oPetty Cash A fund containing a small amount of cash that is used to pay for minor expenses oImprest System A way to account for petty cash by maintaining a constant balance in the petty cash account At any time, cash and petty cash tickets must total the amount allocated to the petty cash fund