ch.6 cash and internal control prof. j. wang. part i internal control
TRANSCRIPT
Ch.6Cash and Internal Control
Prof. J. Wang
Part IInternal Control
Internal Control System
Consists of the policies and procedures necessary to ensure:• The safeguarding of an entity’s assets• The reliability of its accounting records• The accomplishment of its overall
objectives
LO3
Sarbanes-Oxley Act of 2002 (SOX)
Act of Congressintended to bringreform to corporateaccountability andstewardship inresponse to
corporatescandals
Internal Control
Control Environment
AccountingSystem
InternalControl
Procedures
The Control Environment
Management’s competence and operating style
Personnel policies and practices
Influence of board of directors
The Accounting System
Can be manual, fully computerized, or a combination of both
Use of journals is an integral part of any system
Methods and records used to report transactions and maintain financial
information
Internal Control Procedures
Segregationof Duties
SafeguardingAssets and
Records
ProperAuthorizations
IndependentVerification
The Design and Use of Business
Documents
IndependentReview andAppraisal
LO4
Proper Authorizations
Authority and responsibility go hand in hand
LOANAPPROVED
Segregation of Duties
Separate physical custody from the accounting for assets
Independent Verification
One individual or department acts as a check on the work of another
Safeguarding Assets and Records
Protect assets and accounting records from loss, theft, unauthorized use, etc.
Independent Review and Appraisal
Provide for periodic review and appraisal of the accounting system and the people operating it
AuditReport
The Design and Use of Business Documents
Capture all relevant information about a transaction and assist in proper recording and classification.
Are properly controlled
Limitations on Internal Control
No system is entirely foolproof• Employees in collusion can
override the best controls• Cost vs. benefit tradeoff
Part II Cash and Cash Equivalents
Cash
Coin and currency
Checking, savings, and money market accounts
Undeposited checks
Pay to
the o
rder o
f:
ABC Co
.
LO1
Cash Equivalents
Commercial paper U.S. Treasury bills Certain money market funds
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
Readily convertible to cash
Original maturity to investor of three months or less
Part IIICash Managementand internal control over cash
Internal control over cash
LO5
Cash receipts should be deposited intact in the bank on a daily basis
All cash disbursements should be made by check
Use petty cash for small disbursements Prepare monthly bank reconciliation
Controls Over Cash Received in the Mail
Two employees open mail
Prelist prepared Monthly
customer statements
Document Flow for Merchandise
CheckPrepared
PurchaseRequisition
Receiving Report
Purchase Order
Invoice Approval
Purchase Invoice
Part IVBank Reconciliation
Compare balance per bank statement and balance per books, and make sure all differences are accounted for.
Should be performed monthly by someone with no cash recording or custodian responsibilities.
Part VPetty Cash
(Used for small disbursements)
Petty Cash
The company established a petty cash fund of $200, to be managed by the secretary.
Dr. Petty Cash 200 Cr. Cash 200
Petty Cash Transactions for Mickey’s Marathon Sports
Petty Cash Expenditures:
U.S. Post Office 55.00
Overnight Delivery Service 69.50
Office Supply Express 45.30
Coin and currency per count 26.50
No entry is made when petty cash is disbursed
from the fund.
Accounting for Petty Cash
*$200.00 – ($55.00 + 69.50 + 45.30 + 26.50) =$200.00 – $196.30 = $3.70 short
When the fund is replenished, a journalis made:
Postage Expense 55.00
Delivery Expense 69.50
Office Expense 45.30
Cash Over and Short* 3.70
Cash 173.50