Study sets, textbooks, questions
Upgrade to remove ads
Accounting Exam 3
Terms in this set (56)
refers to any act by the management or employees of a business involving an
intentional deception for personal gain.
What is the fraud triangle?
pressure, opportunity, rationalization
What is pressure
· Accountant pressured to have certain results
· Financial pressure at home
· Pressure to maintain appearances
What is rationalization?
· Everyone is doing it
· Not stealing, borrowing
· Stealing for a good cause
· No one noticed, would be more sus to put it back
What is opportunity
· Think they will succeed
1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and Communication
5. Monitoring activities
What is control environment
An environment of ethical
values and integrity is crucial to keeping employees from feeling that it is acceptable to
What is risk assessment?
involves identifying and analyzing relevant risks to an organization's objectives.
What are control activities
are the specific policies and procedures designed to reduce risk.
A control activity can be either a prevention control or a detection control
What are internal controls
are the measures
undertaken by a business to ensure the reliability of its accounting data, protect its assets
from theft or unauthorized use, ensure that employees are following the company's policies
and procedures, and evaluate the performance of employees, departments, divisions, and
the company as a whole.
What are prevention and detection controls
A prevention control is intended to deter a problem or fraud before it can arise.
§ Locked cash register
§ Hard hats
§ Obvious Cameras
A detection control, on the other hand, is designed to discover any problems or fraud shortly after it arises.
§ Counting money every night
§ Gas detectors
§ Hidden Cameras
Name some types of control activities
o Establish Clear Lines of Authority and Responsibility
o Implement Segregation of Duties
o Hire Competent Personnel
§ Someone who has degrees
§ CPA for CFO (won't be blinded)
o Use Control Numbers on all Business Documents
§ Preprinted on paper for each document type
o Develop Plans and Budget
o Maintain Adequate Accounting Records
o Provide Physical and Electronic Controls
§ Lock on a door
What is information and communication control
important that individuals receive a clear message from senior management that control
responsibilities must be taken seriously. To do this, management must obtain or generate
relevant and quality information from both internal and external sources.
What is monitoring activities control
involve ongoing evaluations,
special evaluations, or some combination of each. Ongoing evaluations are built into the
business processes at various levels of the organization and provide timely information.
Example of monitoring activities
§ Internal Audits
· Independent appraisals of the company's financial statements, its internal controls, and its operations
What are the control failures and provide information about them
§ Fidelity Bond
· Protects against an employee who steals
§ Employee Collusion
· 2+ employees work together to avoid internal controls
o Segregation of power people are working together
§ Management Override
· Fraud by CEO or CFO
o They can override everything in the system
The Sarbanes-Oxley Act
This act mandates that all publicly traded U.S.
corporations maintain an adequate system of internal controls. Further, top management
must ensure the reliability of these controls and outside independent auditors must attest
to the adequacy of the controls.
Certificates of deposit
securities issued by a bank when cash is invested for a short period of time, typically three
months to one year. CDs pay a fixed rate of interest on any deposited funds
is a check from another person or company with a date that is later than the current
date. A postdated check does not become equivalent to cash until the actual calendar date
on the check.
is a check from an individual or
company that had an insufficient cash balance in the bank when the holder of the check
presented it to the bank for payment.
meaning that the cash is restricted for a special pur-
pose. For example, a company may have a restriction on its cash to cover a litigation settlement. Restricted cash should be reported separately on the balance sheet as either a current or non-current asset depending on the length of the restriction.
Minimum cash balance that a bank requires a firm to maintain in its bank account when in a loan
cash and cash equivalents
Cash equivalents are
highly liquid, short-term investments of 90 days maturity or less in such risk-free securities
is a form that accompanies a check to inform the company receiving the check about
the purpose of the check.
is a list of all of the checks received on a given day.
· Prepares deposit slip
· Sends to bank
· Sends deposit slip to controller
· Files a copy of deposit slip
· Compared deposit slip to remittance list
· Use remittance list for journal entry
· Uses remittance advices for accounts receivable
· Files all three
· Monthly bank statement from bank
· Prepares bank reconciliation
· Prepares adjusting entries
involves sending an electronic message from one
computer to another to cause a transfer of money from one financial institution to an-
other, or directly to a company.
petty cash fund
is a small amount of cash, for example $300, that is placed in a secure location on a business's premises to be used to pay for small expenditures such as postage, delivery service
charges, and minor purchases of supplies.
The Bank Statement
At the end of each month, a company's bank prepares a bank statement for each check-
ing account that the company maintains and then sends the statement to the internal audit
department of the company that owns the checking account.
is a schedule that (1) accounts for all differences be-
tween the ending cash balance on the bank statement and the ending cash balance in
the Cash account in the company's general ledger and (2) determines the reconciled
cash balance as of the end of the month.
is the asset, usually classified as current, that is created when a sale or service transaction is executed on a credit basis.
Accounting for bad debts and the three examples of it
o Credit-granting policy
§ Policy a company follows to decide which customers should be allowed to buy goods and services on credit and how much credit those customers should be granted
· Credit score
o Credit-collection policy
§ Policy establishing the amount of time that its customers may take before they are required to pay out their outstanding accounts receivable
o Bad Debts Expense
§ Credit losses
Process of estimating and recording the bad debts expense for a business is most often using the allowance method
Allowance for Doubtful Accounts
Debit bad debts expense and credit allowance for doubtful accounts
Estimating Credit Losses
Net sales: $80,000
· Percent expected: 2%
o 80,000*0.02 = $1,600
percentage of net sales method
A method of estimating uncollectible accounts expense in which a business assumes that a certain percentage of each year's net sales will be uncollectible
accounts receivable aging method.
a company determines the amount
needed in the allowance account by analyzing the age structure of its outstanding ac-
counts receivable balances using an aging schedule
is simply an analysis that reveals how much time has elapsed since a
credit sale originally occurred, and consequently, how long a customer's account receiv-
able has remained unpaid.
a written contract with a promise to pay a supplier a specific sum of money at a definite time
a written promise of a customer to pay the business a sum of money at a future date
indicates how many times a year a firm collects its average
accounts receivable, and thus, measures how fast accounts receivable are being
converted into cash. Accounts receivable turnover is calculated as follows:
Net Sales/Average Accounts Receivable
Factoring and Discounting
Selling an account receivable is called factoring and selling a note receivable is called discounting. Finance companies and financial institutions that buy receivables are called factors.
o Plant Assets
§ Plant and equipment
o Intangible Assets
§ Copyrights, franchises, patents
o Natural Resources
§ Timber stands, mineral deposits, oil and gas deposits
the amount of cash paid when the asset is
acquired and readied for use by a business.
Acquisition Costs Related to Land
§ Land improvements
§ Leasehold improvements
Deferred Payment Purchases
If an asset's purchase price is not immediately paid in cash, the cash-equivalent purchase
price at the date of acquisition is determined and recorded in the asset account.
Nature of Depreciation
o Useful life
o Salvage value
is to allocate, in a systematic
and rational manner, the difference between an asset's acquisition cost and its estimated
salvage value over the estimated useful life of the asset.
A depreciation method that allocates a varying amount of depreciation each year based on an asset's usage.
A depreciation method that allocates an equal amount of depreciation each year. (Cost - Residual value) / Useful life.
a depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation expense over the asset's useful life
If an asset's remaining book value cannot be recovered through the future cash
flows expected to be generated from the asset's use, the asset's value is said to be impaired.
1.Expenditures for ordinary maintenance and repairs of existing plant assets.
2.Expenditures to acquire low-cost items that benefit the firm for several periods.
are expenditures that (1) extend the useful life of an asset, (2) improve the
quality and/or quantity of the asset's output, or (3) reduce the asset's operating expenses.
Recommended textbook explanations
Glencoe Accounting: First Year Course
Loose-leaf for Managerial Accounting
Ray H Garrison
Cost Accounting: A Managerial Emphasis
Charles T. Horngren, Srikant M. Datar
Charles T. Horngren, Srikant M. Datar
Other sets by this creator
Macro Final Exam
MacroEconomics Exam 3
Macroeconomics Exam 2
Macro Economics Exam 1
Other Quizlet sets
PSC1121 Final Exam Study Guide
History Test: Section 1
Ancient Greece and Rome Review
Egypt and Mesopotamia