Questions and Answers
What are financial audits primarily intended to provide?
The integrity and ethical values of the company, including its code of conduct, involvement of the board of directors, and other actions that set the tone of the organization are features of the ___________ component of internal controls.
control environment
Which legislation provides the regulatory authority for internal control requirements?
The Sarbanes-Oxley Act
What is materiality?
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Checking accounts are _______ accounts to a bank because they represent an obligation for the bank to repay the customer.
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To calculate the true cash balance, _______ deposits in transit and _________ outstanding checks to or from the unadjusted bank balance.
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What do bank statement credit memos describe?
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Procedures such as segregation of duties, account reconciliations, and other practices that are designed to safeguard assets and enable an organization to prepare reliable financial statements are identified as _________ activities in the COSO framework.
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For reporting purposes, savings accounts with substantial withdrawal penalties should be classified as ___________.
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What is the formula to calculate the true cash balance?
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Companies may decide to look to the ERM framework both to satisfy their __________ control needs and to move toward a fuller ____________ management process.
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What is collusion in the context of internal controls?
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Which principle of the AICPA Code of Professional Conduct requires members to strive continually to improve competence?
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A ________ check is guaranteed for payment by a bank.
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A ________ bond provides insurance that protects a company from losses caused by employee dishonesty.
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Calculate Karen Company's true cash balance given the following: unadjusted bank balance of $1200, $200 in deposits in transit, $400 in outstanding checks, and a $100 service charge.
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Study Notes
Financial Audits
- Financial audits provide reasonable assurance that financial statements are free from material misstatements due to errors or fraud.
Internal Control Components
- The control environment reflects a company's integrity, ethical values, code of conduct, and the involvement of the board of directors.
Regulatory Authority
- The Sarbanes-Oxley Act establishes regulatory authority for internal control requirements in organizations.
Materiality
- Materiality is a subjective measure that can vary in both dollar amounts and percentage sizes, influencing financial reporting.
Checking Accounts
- Checking accounts are classified as liability accounts for banks, representing their obligation to repay customers.
Cash Balance Calculation
- To find the true cash balance, add deposits in transit and subtract outstanding checks from the unadjusted bank balance.
Bank Statement Memos
- Credit memos on bank statements indicate transactions that increase a customer's checking account balance.
Control Activities
- Control activities in the COSO framework include procedures like segregation of duties and account reconciliations that protect assets and ensure accurate financial reporting.
Savings Accounts
- Savings accounts with significant withdrawal penalties should be reported as investments for accounting purposes.
True Cash Balance Formula
- The calculation for true cash balance is: unadjusted bank balance + deposits in transit - outstanding checks.
Enterprise Risk Management (ERM)
- Companies utilize the ERM framework to address internal control needs and enhance their overall risk management processes.
Collusion
- Collusion involves two or more employees collaborating to bypass internal controls by covering for each other's actions.
AICPA Code of Professional Conduct
- The principle of Due Care in the AICPA Code mandates that members continually strive to improve their professional competence.
Certified Checks
- A certified check is a check guaranteed for payment by the bank, ensuring it will be honored upon presentation.
Fidelity Bond
- A fidelity bond protects a company against losses caused by the dishonest actions of its employees.
True Cash Balance Example
- For Karen Company, the true cash balance is $1,100, calculated by adjusting the unadjusted bank balance of $1,200 with deposits in transit and outstanding checks while correcting a bank error.
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Description
This quiz focuses on key concepts related to financial audits and the internal control framework, specifically the control environment. Test your understanding of the principles that ensure the accuracy and integrity of financial statements. Ideal for students delving into accounting and finance.
