Fraud & Internal Controls
What are the 3 elements of the fraud triangle?
Opportunity, financial pressure, and rationalization
What is a bank reconciliation?
Process of comparing bank’s balance with company’s balance and explaining differences to make them agree.
Define “Accounts Receivable.”
Amounts owed by customers on account
What method estimates uncollectible accounts at the end of each period?
Allowance method
Which category of plant assets does not depreciate?
Land
What law was passed to strengthen corporate internal controls after early 2000s scandals?
The Sarbanes–Oxley Act (SOX)
How are outstanding checks treated in the reconciliation?
Subtracted from the bank balance
Give one example of an “Other Receivable.”
Interest, employee advances, tax refunds, etc.
What type of account is Allowance for Doubtful Accounts?
Contra-asset
Give 3 examples of intangible assets.
Patents, copyrights, licenses, trademarks, trade names, goodwill, franchises, and leases.
What is the main purpose of internal control?
To safeguard assets and ensure reliability of accounting records
Who should prepare the bank reconciliation for best internal control?
An employee with no other cash responsibilities
What entry records a sale on account?
DR Accounts Receivable
CR Sales
What is the journal entry to write off an uncollectible account? under the allowance method?
DR Allowance for Doubtful Accounts
CR Accounts Receivable
What is the process of allocating to expense the cost of an intangible asset over its useful life.
Amortization
What internal control principle requires separating record-keeping from custody of assets?
Segregation of duties
What is an example of an "other payment" that may be subtracted from the book cash balance?
NSF check or service charge
What ratio measures how efficiently a company collects receivables?
Accounts Receivable Turnover
Which method of recording uncollectible accounts is allowed by GAAP? Direct write-off or Allowance?
Allowance method
What is the return on assets ratio formula.
Net Income / Average Total Assets
Why are prenumbered documents used?
To ensure all documents are accounted for (documentation procedures)
What is a deposit in transit and how is it treated on the bank reconciliation?
Items recorded by the depositor that have not been recorded by the bank, added to the bank statement balance.
What is the financial instrument that indicates a Note Receivable? It is a written promise to pay a specified amount of money on demand or at a definite time.
Promissory note
What is the journal entry used to record estimated amount of claims on customers that the company expects will become uncollectible under the allowance method?
DR Bad Debt Expense
CR Allowance for Doubtful Accounts
What ratio indicates how efficiently a company uses its assets?
Asset Turnover