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Chapter 7: 2RQ (page 411)
Question: How does the Sarbanes-Oxley Act relate to internal controls?
Answer:
Sarbanes-Oxley Act revamped corporate governance in the United States and was introduced to establish the internal control system in an organization to prevent the accounting scandals.
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What is separation of duties?
Why is it necessary to record journal entries after the bank reconciliation has been prepared? Which side of the bank reconciliation requires journal entries?
Understanding the Sarbanes-Oxley Act and identifying internal control strengths and weaknesses. The following situations suggest a strength or a weakness in internal control.
a. Top managers delegate all internal control procedures to the accounting department.
b. Accounting department staff (or the bookkeeper) orders merchandise and approves invoices for payment.
c. Cash received over the counter is controlled by the sales clerk, who rings up the sale and places the cash in the register. The sales clerk matches the total recorded by the register to each day’s cash sales.
d. The employee who signs checks need not examine the payment packet because he is confident the amounts are correct.
Requirements
1. Define internalcontrol.
2. The system of internal control must be tested by external auditors. What law or rule requires this testing?
3. Identify each item in the list above as either a strength or a weakness in internal control, and give your reason for each answer.
The Scott Sun & Shade Company had the following financial data at December 31, 2018:
Cash and cash equivalents $ 60,000
Total current liabilities 75,000
What is the cash ratio as of December 31, 2018, for Scott Sun & Shade?
Match the accounting terminology to the definitions.
1. Sarbanes-Oxley Act
2. Internal control
3. Encryption
4. Separation of duties
5. Internal auditors
a. Organizational plan and all the related measures adopted by an entity to safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting records.
b. Employees of the business who ensure that the company’s employees are following company policies and meeting legal requirements and that operations are running efficiently.
c. Rearranging plain-text messages by a mathematical process—the primary method of achieving security in e-commerce.
d. Requires companies to review internal control and take responsibility for the accuracy and
completeness of their financial reports.
e. Dividing responsibilities between two or more people.
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