CASHGroup 5 2-CFMJigs ParcoNiña MalagueñoMikael AgbayaniLance Rivera

Internal ControlDefined as the procedures and processes used by a company/firm to: Safeguard its assets Process information accurately through

the Financial Statements Ensure compliance with laws and

regulations to the (BIR, SEC, BSP and IC)

Integrated Framework- The standard by which companies design, analyze and evaluate internal control

Objectives of Internal Control- are used to provide reasonable assurance that:

Assets are safeguarded and used for business purposes and strategies

Business information is accurate Employees and managers comply with the laws

and regulations of the company

Elements of Internal Control

Control Environment- the overall attitude of the management and employees about the importance of internal controls. This is the tone at the top which is a gauge on how the management is firm in implementing controls. This includes the following:

Management’s Philosophy and operating style (Emphasis on Internal Controls)

The company’s organizational structure (Planning and Controlling)

The company’s personnel policies (hiring, training, evaluation, compensation and promotion)

Risk Assessment- Identifying & Assessing risks and their impact on their organization Customer requirements, competitive threats, regulatory changes and changes in

economic factors. Management should identify such risks, analyze their

significance, assess their likelihood of occurring and take necessary actions to

minize them. Credit risk- the risk that the borrower can’t

pay off his/her financial obligations

Control Procedures- provide reasonable assurance that business that business goals will be achieved, includes the prevention of fraud

1. Competent personnel, rotating duties and mandatory vacations.

2. Separating responsibilities for related operations3. Separating operations, custody of assets and

accounting4. Proofs and security measures

Mechanisms/Practices/Procedures Address risks identified

Monitoring- used to locate weakness and improve controls. Monitoring often includes observing employee behavior and the accounting system for indicators of control problems

Internal Auditor- responsible for day-to-day monitoring controls

Warning Signs of Internal Control Problems (From People)

1. Abrupt change in lifestyle( without winning the lottery)

2. Close relationships with the suppliers3. Refusing to take a vacation4. Frequent borrowing from other

employees5. Excessive use of alcohol and drugs

Warning Signs of Internal Control Problems (From the Accounting System)

1. Missing documents or gaps in transaction numbers (fraud transactions)

2. Unusual increase in customer refunds3. Differences between daily cash receipts and

bank deposits (could mean receipts are being pocketed before deposited)

4. Sudden increase in slow payments5. Backlog in recording transactions (possibly

an attempt to delay detection of fraud)

Information and Communication Information about the control environment, risk

assessments control procedures and monitoring is used by management for guiding operations and ensuring compliance with reporting, legal and regulatory requirements.

Used to dissimilate information throughout the company

Communication from top-level to the bottom-level or vice versa

Makes a firm a cohesive unit Management also uses external information to assess

events

Cash Includes coins, currency, checks and

money orders, notes, bills Money on deposit with a deposit with a

bank that is available for withdrawal Most liquid asset Most likely asset to be stolen or used

improperly Can be On hand or In Bank Available for immediate and general use

Internal Controls Related to Cash

Segregation of Duties – Accounting/Recording Function or Cash Custodianship

Voucher System– Disbursement Functions-Represented by a voucher- Legal documents

that serves as proof of authority to pay cash or issue EFTs

Electronic Funds Transfer --- Payments or Withdrawals Issuance of Official Receipts– Deposits to bank

-made when cash is received

Common Fraud Related to cash Kiting- Happens when someone has 2 or

more bank account. Employed at the end of the month

Lapping- Process of Theft. Wrong declaration of cash collections

Window Processing- Applies also with Financial statements. Makes Financial statements appear better

Cash Received from Sale Is an important control to protect cash

received in over –the-counter sales is a cash register.

The use of a cash register to control cash is shown:

Cash Received in the Mail Cash is received in the mail when

customers pay their bills. This is usually in the form of checks and money orders

Cash Received by EFT Cash may be also be received from

customers through electronic funds transfer (EFT).

Electronic funds transfer (EFT) is the electronic exchange, transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems.

Bank Reconciliation Comparison of:

Two independently maintained records of a business’s cash The company’s Cash account (T-Account, the book balance) The bank statement

Differences between the two records generally arise because of timing differences. Deposits were made but after the bank statement was

printed and mailed. Checks were written but have not cleared the bank

when the bank statement was printed mailed. Reconciliations ensure that the two records

agree.

Bank ReconciliationItems for reconciliation: Items RECORDED by the company but

not yet recorded by the bank: Deposits in transit Outstanding checks

Bank ReconciliationItems for reconciliation: Items recorded by the bank BUT NOT YET

recorded by the company. Bank collections

deposits received directly by the bank from customers Electronic funds transfers

Both payments and deposits Service charges and the cost of printed checks Interest revenue earned on checking account

Errors by the company or the bank

Bank Reconciliation The adjusted bank balance must equal

the adjusted books balance Book Balance = Ending Cash Account

This is how we ensure Control over Cash

Reconciling ItemsBank Balance

Add deposits in transit

Subtract outstanding checks

Add or subtract corrections of bank errors, as appropriate

Book Balance Add bank collection

items, interest revenue, and EFT receipts

Add or subtract corrections of book errors, as appropriate.

CASH EQUIVALENTCash equivalents are investments that can be readily converted to cash. Common examples of cash equivalents include commercial paper, treasury bills, short term government bonds, marketable securities, and money market holdings. An item should satisfy the following criteria to qualify for cash equivalent.

The investment should be short term. They should mature in less than three months. If they mature in more than three months they will be classified as other investments.

They should be highly liquid. This means that they should be easily sold in the market. The buyers of these investments should be easily available.

They should be convertible to known amounts of cash. This means that their market price should be available and this market price should not be subject to significant fluctuations.

They should not be too risky. There should be very little risk of changes in their value. This means that equity shares cannot be classified as cash equivalents. But preferred shares purchased shortly before the redemption date can be classified as cash equivalents.

Examples Treasury bills: These items are debt instruments the

U.S. Department of Treasury issues that mature in less than one year.

Commercial paper: This term refers to notes receivable with no collateral to back up the debt. Commercial paper has a maturity date of less than 270 days.

Money market funds: Money market accounts are similar to checking accounts, except they generally pay a higher interest rate on deposited funds than regular checking. However, they also usually require maintaining minimum balances.

CASH DISBURSEMENT Cash outflow or payment of money to

settle obligations such as operating expenses, interest payments for loans and accounts receivables during a particular order to carry out business activities.

Cash disbursement is a process by which a business pays out money to a person or organization typically related to operating expenses for that business. While the name implies this type of payment is made out in cash, which is possible, it is common for payments to be made as checks or credit transactions.

Forms of Cash Disbursement Cash Plastic Money Check Warrants Electronic Fund Transfer

Petty Cash Fund Petty cash is a small amount of

discretionary funds in the form of cash used for expenditures where it is not sensible to make any disbursement by check, because of the inconvenience and costs of writing, signing and then cashing the check.

As expenditures are made, the custodian of the fund will reimburse employees and receive a petty cash voucher with a receipt/invoice attached in return. At any given time the total of cash on hand plus reimbursed vouchers must equal the original fund.

Resources http://www.readyratios.com/reference/ac

counting/cash_and_cash_equivalents.html

http://www.wisegeek.com/what-is-cash-disbursement.htm

http://en.wikipedia.org/wiki/Petty_cash http://www.cliffsnotes.com/more-subject

s/accounting/accounting-principles-i/cash/the-petty-cash-fund

Resources Accounting Principles Using Excels for

SuccesAuthor: James Reeve, Johan Duchac, Carl Warren

Financial Accounting Volume one 2013 edition

Author: Conrado Valix, Jose Peralta, Christian Aris Valix