ch.6 cash and internal control prof. j. wang. part i internal control

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