internal control & cash
TRANSCRIPT
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Internal Control and CashChapter 4
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Describe fraud and its impact
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Fraud
•Intentional misrepresentation of facts•Causes injury or damage to another party•Large problem that increases each year
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Types of Fraud
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Fraud Triangle
Motive
RationalizationOpportunity
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Explain the objectives and components of internal control
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Internal Control
•Primary way fraud and errors are: ▫Prevented▫Detected or▫Corrected
•Management and Board of Directors implement a:▫Plan of organization ▫System of procedures
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Objectives of Internal Control
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Sarbanes-Oxley Act (SOX)
•Federal law requiring public companies to have system of internal controls ▫Auditors examine controls and issue
reports on reliability•Provisions:
▫Require internal control report by companies
▫Create Public Company Accounting Oversight Board
▫Limit non-audit services of auditing firms▫Penalize violators
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Shield of Internal Control
Internal Controls
Fraud
Waste
Inefficiency
Company assets
Company assets
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Control Procedures
Monitoring
Information System
Control Environment
Risk Assessment
Components of Internal Control
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Control Environment
•Tone at the top▫Starts with owner(s) and top managers
acting ethically•Key ingredient
▫Corporate code of ethics
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Risk Assessment
•Identify business risks•Establish procedures to deal with risks
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Information System and Control Procedures•Information System
▫How accounting information enters and exits company
▫System must capture, process, and report transactions accurately
•Control procedures▫Built-in control environment and
information system▫How companies meet five objectives of
internal control
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Monitoring Controls
•Prohibit one employee or a group from processing a transaction completely
•Program controls into computerized system
•Hired auditors to monitor controls▫Internal – monitor from the inside to
safeguard assets▫External – test from the outside to ensure
accounting records are accurate
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Internal Control Procedures
•Smart Hiring Practices•Separation of Duties
▫Asset handling▫Record keeping▫Transaction approval
•Comparison and Compliance Monitoring▫Operating and cash budgets▫Audits▫Manual or computer checks
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Internal Control Procedures
•Adequate Records▫Hard copy or electronic
•Limited Access▫Assets by custodians▫Records by accounting department
•Proper Approvals▫The larger the transaction, the more
specific approval
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SCALP
•Smart hiring practices and segregation of duties
•Comparisons and compliance monitoring•Adequate records•Limited access •Proper approvals
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Information Technology (IT)
•Accounting systems rely on more than ever before
•Examples:▫Electronic sensors▫Barcode scanning
•Basic attributes of internal control do not change▫Procedures to implement are different
•Use of computers can greatly improve speed and accuracy
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Safeguard Controls
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Internal Controls for E-Commerce•Pitfalls of e-commerce
▫Stolen credit card numbers▫Computer viruses and Trojan Horses▫Phishing expeditions
•Security measures▫Encryption▫Firewalls
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Costs and Benefits of Internal Control•Ways good internal control can be
circumvented▫Collusion▫Management override▫Fatigue & negligence
•The stricter the internal control, the more it costs▫The benefits should outweigh the costs
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Design and use a bank reconciliation
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Bank Account as Control Device
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Bank Account Documents
•Signature card▫Protects against forgery
•Deposit ticket▫Proof of transaction
•Check▫Maker – signs the check▫Payee – to whom the check is paid▫Bank – where funds are drawn
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Bank Statement
•Reports:▫Cash receipts▫Cash payments
•Electronic Funds Transfer (EFT)▫Make payments by
electronic communication
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Bank Reconciliation
•Two records of a business’s cash▫The Cash account in the general ledger▫The bank statement
•Amounts are usually different▫Time lags in recording transactions
•Bank reconciliation explains differences
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Bank Side of the Reconciliation
•Deposits in transit•Outstanding checks•Bank errors
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Book Side of the Reconciliation
•Bank collections•Electronic funds transfers (EFT)•Service charges•Interest revenue•Nonsufficient funds (NSF) checks•Cost of printed checks•Book errors
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Exercise 4-21A
Bank: Books:
Balance, November 30
$570 Balance, November 30
$1,780
Add: Add:
Deposit in transit 1,765 EFT rent collection 335
Less:
Service charges (18)
Less: NSF checks (120)
Outstanding checks (601) Correction of error (243)
$1,734 $1,734
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Summary of Reconciling Items
BANK BALANCE - ALWAYS BOOK BALANCE - ALWAYS
Add deposits in transit Add bank collections, interest revenue, and EFT receipts
Subtract outstanding checks Subtract services charges, NSF checks, EFT payments
Add or subtract correction of bank errors
Add or subtract correction of book errors
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Journalizing Bank Reconciliation Items•All items on the book side of the bank
reconciliation require journal entries•If the item is added to book side
▫Debit Cash•If the items is subtracted from the book
side▫Credit Cash
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JOURNAL
Date
Accounts and explanation Debit Credit
Cash
Interest Revenue
To record interest earned on the bank statement
Cash
Accounts Receivable
Account receivable collected by bank
Miscellaneous Expense
Cash
Bank service charges
Accounts Receivable
Cash
NSF check returned by bank
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Evaluate internal controls over cash receipts and cash payments
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Internal Control over Cash
•Cash is easy to steal•All transactions ultimately affect cash•Cash receipts should be deposited quickly•Companies can receive cash
▫Over the counter▫Through the mail
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Cash Receipts over the Counter•Point-of-sale terminals provide control over
cash receipts▫Also record sale, cost of item sold, and
reduction to inventory•Customer issued a receipt as proof of
purchase•Sales associate turns in cash drawer at end
of shift▫Combined with other cash and deposited
•Accounting department reconciles sales per terminal to cash in drawer
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Cash Receipts by MailMailroomMailroom
ChecksChecks Remittance advicesRemittance advices
Accounting DepartmentAccounting DepartmentTreasurerTreasurer
Debit to Cash
Debit to Cash
Deposit receipt
Bank Controller
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Controls Over Payments by Check•Payment by check or EFT payment is an
important internal control▫Provides record of the payment▫Check must be signed by an authorized
official▫EFT must be approved by an authorized
official▫Should be supported by evidence payment
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Cash Payments by Check
Receiving Report
Receiving Report
InvoiceInvoice
Inventory
Purchase Order
Purchase Order
Check or EFT
Check or EFT
Company A
Company X
1
4
3
2
2
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Internal Control for Purchasing
•Segregate the following duties:▫Purchasing ▫Receiving▫Approving and Paying
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Payment PacketReceiving
Report
Invoice
Purchase Order
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Petty Cash
•Small fund to make minor purchases•One employee is responsible for the
accounting▫Custodian
•Set amount of cash •Voucher prepared for each payment•Sum of fund plus paid voucher should
equal set amount▫Imprest system
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Construct and use a cash budget
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Budgeting
•Budget▫Financial plan to coordinate activities
•Cash budget▫Planning receipts and payments
•Steps:▫Start with beginning cash balance▫Add budgeted receipts and subtract budget
payments▫Equals expected cash balance▫Compare cash available to budgeted cash
balance
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Expected Cash Balance
If expected cash is greater than
minimum needed
Invest excess
If expected cash is less than
minimum needed
Consider borrowin
g
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Cash Budget
Beginning cash balance
Budgeted cash receipts:
Collections from customers
Dividends from investments
Sale of plant and equipment
Budgeted cash payments:
Purchases of inventory
Operating expenses
Purchase of long-term assets
Payment of dividends
Payment of long-term debt
Cash available (needed)
Budgeted cash balance, end of period
Cash available for investing or (new financing needed)
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Exercise 4-25ACash Budget - Gale Communications Inc.
Beginning cash balance $78
Budgeted cash receipts:
Collections from customers 11,335
Sale of assets 157
11,570
Budgeted cash payments:
Cost of services and products
$6,169
Operating expense 2,553
Purchase of new equipment 1,822
Debt payments 578
Cash dividends 358 11,480
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Cash available $90
Budgeted cash balance, end of period (78)
Cash available for investing $12
Exercise 4-25A (continued)
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Reporting Cash on the Balance Sheet•All cash accounts combined into a single
total ▫Cash & Cash Equivalents
•Cash equivalents include▫Time deposits▫Certificates of deposit▫High grade government securities
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Compensating Balances
•Cash balance should not include cash that is restricted in any way
•Company that borrows agrees to maintain a minimum cash balance▫Compensating balance agreement
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