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BY R A C H E L L E A G AT H A , C PA , M B A
Sarbanes-Oxley, Internal Control and Cash
Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac
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1. Describe the Sarbanes-Oxley Act of 2002 and its impact on internal controls and financial reporting.
2. Describe and illustrate the objectives and elements of internal control.
3. Describe and illustrate the application of internal controls to cash.
Objectives:
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4. Describe the nature of a bank account and its use in controlling cash.
5. Describe and illustrate the use of a bank reconciliation in controlling cash.
6. Describe the accounting for special-purpose cash funds.
Objectives:
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7. Describe and illustrate the reporting of cash and cash equivalents in the financial statements.
Objectives:
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Describe the Sarbanes-Oxley Act
of 2002 and its impact on internal
controls and financial reporting.
Objective 1
Objective 1
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The Sarbanes-Oxley Act of 2002 (referred to simply as
Sarbanes-Oxley) applies only to companies whose stock is traded on public exchanges.
Its purpose is to restore public confidence and trust in
the financial statements of companies.
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Sarbanes-Oxley requires companies to maintain strong
and effective internal control.
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Internal control is broadly defined as the
procedures and processes used by a
company to safeguard its assets, process
information accurately, and ensure compliance
with laws and regulations.
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Describe and illustrate the objectives and
elements of internal control.
Objective 2
Objective 2
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1) assets are safeguarded and used for business purposes,
2) business information is accurate, and
3) employees comply with laws and regulations.
To provide reasonable assurance that:
Objectives of Internal Control
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Employee fraud is the intentional act of deceiving an employer for personal gain.
8-2
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1) the control environment,2) risk assessment,3) control procedures,4) monitoring, and5) information and
communication.
Management is responsible for designing and applying five elements of internal control to meet the three internal control objectives. These elements are—
Five Elements of Internal Control
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A business’s control environment is the overall attitude of management and
employees about the importance of controls.
Control Environment
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Factors That Influence the Control Environment
Management’s philosophy and operating style
The business’s organizational structure
Personnel policies
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Control Environment
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Example of control procedures for an all-night convenience store:
Locate the cash register near the door, so that it is fully visible from outside the store; have two employees work late hours; employ a security guard.
Deposit cash in the bank daily, before 5 p.m.
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Keep only small amounts of cash on hand after 5 p.m. by depositing excess cash in a store safe that can’t be opened by employees on duty.
Install cameras and alarm systems.
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Indicators of Internal Control Problems
Warning Signs With Regard to People1. Abrupt change in lifestyle.
2. Close social relationships with suppliers.
3. Refusing to take a vacation.4. Frequent borrowing from other
employees.5. Excessive use of alcohol or
drugs.
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Indicators of Internal Control Problems
Warning Signs from the Accounting System
1. Missing documents or gaps in transaction numbers.
2. An unusual increase in customer refunds.
3. Differences between daily cash receipts and bank deposits.
4. Sudden increase in slow payments.
5. Backlog in recording transactions.
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Describe and illustrate the application of
internal controls to cash.
Objective 3Objective 3
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One of the most important controls to protect cash received in over-the-counter
sales is a cash register.
Control of Cash Receipts
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A predetermined amount of money that is given to
each cash register clerk in a cash drawer is called a
change fund.
Change Fund
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Mar 19Cash 3 142 00Cash Short and Over 8 00
To record cash sales and
actual cash on hand.
Sales 3 150 00
Cash sales for March 19 totaled $3,150.00 per the cash register tape. After removing the change fund, only $3,142.00 was on hand.
Cash Short and Over
Note that the shortage was debited to Cash Short and Over.
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Control of Cash Receipts
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Cash may be received from customers through electronic funds
transfers. Customers may authorize automatic
electronic transfers from their checking accounts to
pay monthly bills.
Electronic Funds Transfers
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A voucher system is a set of procedures for
authorizing and recording liabilities and cash payments. It may
be either manual or computerized.
Voucher System
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A voucher is any document that
serves as proof of authority to pay cash or issue an electronic funds
transfer.
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Describe the nature of a bank account and its
use in controlling cash.
Objective 4
Objective 4
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A major reason that businesses use bank
accounts is for control purposes.
Use of Bank Accounts
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Bank accounts provide an independent recording of cash transactions that can be used as a verification of the business’s recording of
transactions.
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A summary received from the bank of all checking account
transaction is called a bank statement.
Bank Statement
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Bank Statement
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Bank Statement
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Typical credit or debit memorandum entries found on the bank statement:
EC — Error correction to correct bank error.NSF — Not sufficient funds check.SC — Service charge.ACH — Automated Clearing House entry for electronic funds transfer.MS — Miscellaneous items.
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-The following items may appear on a bank statement:
(1) NSF check(2) EFT Deposit(3) Service Charge(4) Bank correction of an error from
recording a $400 check as $40.
Indicate whether the item would appear as a debit or credit memorandum on the bank statement and whether the item would increase or decrease the balance of depositor’s account.
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Appears on the Bank
Statement as a Debit or
Credit Memorandu
m
Increases or Decreases
the Balance of the
Depositor’s Bank
Account
Item No.
(1) Debit Memorandum Decreases
(2) Credit Memorandum Increases
(3) Debit Memorandum Decreases
(4) Debit Memorandum Decreases
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Power Networking should determine the reason for difference in these two amounts.
Power Networking’s Records and Bank Statement
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Describe and illustrate the use of a bank reconciliation in controlling cash.
Objective 5Objective 5
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A bank reconciliation is an analysis of the items and amounts that cause
the cash balance reported in the bank statement to differ from the balance of the cash account in the
ledger in order to determine the adjusted
cash balance.
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Cash balance according to bank statement 8,600.50$ Add: Deposit in transit on October 31 13,690.45
22,290.95 Deduct: Outstanding checks 7,115.35 Adjusted balance 15,175.60$
Cash balance according to company's records 9,305.60$ Add:Error in recording Check No. 1007 as $4,715instead of $4,175 540 Note for $5,000 collected by bank, including Interest 5,375 5,915.00
15,220.60 Deduct: Bank service charges 45.00 Adjusted balance 15,175.60$
LOCK-IT CO.Bank Reconciliation
31-Oct-08
Bank Reconcilation
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Bank’s records
Beginning balance $3,359.78 Beginning balance $2,549.99
Power Network prepares to reconcile the monthly bank
statement as of July 31. The bank statement shows an ending cash
balance of $3,359.78. The company’s Cash account has a July 31 balance of $2,549.99.
Company’s records
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Beginning balance $3,359.78 Beginning balance $2,549.99Add deposit not recorded by bank 816.20
$4,175.98
A deposit of $816.20 did not appear on the bank statement.
Company’s recordsBank’s records
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Beginning balance $3,359.78 Beginning balance $2,549.99Add deposit not recorded by bank 816.20
$4,175.98
The bank collected a note in the amount of $400 and the related interest of $8 for Power
Networking
Add note and interest collected by bank
408.00 $2,957.99
Company’s recordsBank’s records
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Beginning balance $3,359.78 Beginning balance $2,549.99Add deposit not recorded by bank 816.20
$4,175.98
Add note and interest collected by bank
408.00 $2,957.99
Three checks that were written during the period did not appear on the bank statement: No. 812,
$1,061; No. 878, $435.39, No. 883, $48.60.
Deduct outstanding checks:
No. 812 $1,061.00No. 878 435.39No. 883 48.60 1,544.99
Company’s recordsBank’s records
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Beginning balance $3,359.78 Beginning balance $2,549.99Add deposit not recorded by bank 816.20
$4,175.98
Add note and interest collected by bank
408.00 $2,957.99
Deduct outstanding checks:
No. 812 $1,061.00No. 878 435.39No. 883 48.60 1,544.99
The bank returned a check for $300 from customer (Thomas Ivey) because of insufficient
funds (NSF).
Company’s recordsBank’s records
Deduct check NSF $300.00
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Beginning balance $3,359.78 Beginning balance $2,549.99Add deposit not recorded by bank 816.20
$4,175.98
Add note and interest collected by bank
408.00 $2,957.99
Deduct outstanding checks:
No. 812 $1,061.00No. 878 435.39No. 883 48.60 1,544.99
Bank service charges 18.00
The bank service charges totaled $18.00.
Company’s recordsBank’s records
Deduct check NSF $300.00
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Beginning balance $3,359.78
Company’s records
Beginning balance $2,549.99Add deposit not recorded by bank 816.20
$4,175.98
Add note and interest collected by bank
408.00 $2,957.99
Deduct outstanding checks:
No. 812 $1,061.00No. 878 435.39No. 883 48.60 1,544.99
Bank service charges 18.00Error recording Check No. 879 9.00
327.00
Check No. 879 for $732.26 to Taylor Co. on account, erroneously recorded in journal as $723.26.
Bank’s records
Deduct check NSF $300.00
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Beginning balance $3,359.78 Beginning balance $2,549.99Add deposit not recorded by bank 816.20
$4,175.98
Add note and interest collected by bank
408.00 $2,957.99
Deduct outstanding checks:
No. 812 $1,061.00No. 878 435.39No. 883 48.60 1,544.99
Deduct check NSF $300.00
Bank service charges 18.00
Adjusted balance $2,630.99 Adjusted balance $2,630.99
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Company’s recordsBank’s records
Error recording Check No. 879 9.00
327.00
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Journal entries must be prepared for those
items that affected the company’s (depositor’s)
side of the reconciliation.
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Beginning balance $2,549.99
Add note and interest collected by bank 408.00
$2,957.99Deduct check
NSF $300.00Bank service charges 18.00
327.00
Error recording Check No. 879 9.00
Company’s records
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July 31 Cash 408 00
Note collected by bank.
Notes Receivable 400 00
Interest Income8 00
Entry to Record Plus Items
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Beginning balance $2,549.99
Add note and interest collected by bank 408.00
$2,957.99Deduct check
NSF $300.00Bank service charges 18.00
327.00
Error recording Check No. 879 9.00
Company’s records
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July 31 Cash 408 00
Note collected by bank.
Notes Receivable 400 00
Interest Income8 00
31 Accounts Receivable—Thomas Ivey 300 00 Miscellaneous Expense 18 00 Accounts Payable—Taylor Co. 9 00 Cash 327 00
NSF check, bank service charges, and error in recording Check no. 879.
Entry to Record Minus Items
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The following data were gathered to use in reconciling the bank account of Photo Op.
Balance per bank $14,500Balance per company records13,875Bank service charges 75Deposit in transit 3,750NSF check 800Outstanding checks 5,250
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a. What is the adjusted balance on the bank reconciliation?
b. Journalize any necessary entries for Photo OP based upon the bank reconciliation.
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a. $13,000, as shown below.
Bank section of reconciliation: $14,500 – $5,250 + $3,750 =
$13,000
Company section of reconciliation: $13,875 – $75 – $800 = $13,000b. Accounts Receivable 800 Miscellaneous Expense 75
Cash 875
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Cash balance according to bank statement 8,600.50$ Add: Deposit in transit on October 31 13,690.45
22,290.95 Deduct: Outstanding checks 7,115.35 Adjusted balance 15,175.60$
Cash balance according to company's records 9,305.60$ Add:Error in recording Check No. 1007 as $4,715instead of $4,175 540 Note for $5,000 collected by bank, including Interest 5,375 5,915.00
15,220.60 Deduct: Bank service charges 45.00 Adjusted balance 15,175.60$
LOCK-IT CO.Bank Reconciliation
31-Oct-08
Bank Reconcilation
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Describe the accounting for special-purpose
cash funds.
Objective 6Objective 6
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It is usually not practical for a business to write
checks to pay small amounts. Thus, it is
desirable to control such payments by using a
special cash fund, called a petty cash fund.
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On August 1, issued Check No. 511 for $500 to established a petty cash fund.
Post. Ref.
JOURNAL
Date Description Debit Credit
Page 9
Aug. 1 Petty Cash 500 00
2008
Cash 500 00Established petty
cash fund issuing Check 511.
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At the end of August, the petty cash receipts indicated expenditures for the following items: office supplies, $380, postage (office supplies), $22; store supplies, $35, and miscellaneous administrative items, $30.
Aug. 31 Office Supplies 402 00
Replenished petty cash
fund.
Cash 467 00
Store Supplies 35 00
Miscellaneous Administrative Exp. 30 00
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Replenishing the petty cash fund restores it to its original amount of $500.
Note that there is no entry to Petty Cash when the
fund is replenished.
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Businesses often use special cash funds to
meet other needs, such as payroll. Such funds
are called special-purpose funds.
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Prepare journal entries for each of the following;
a) Issued check to establish a petty cash fund of $500.
b) The amount of cash in the petty cash fund is currently $120. Issued a check to replenish the fund, based on the following summary of petty cash receipts: office supplies, $300 and miscellaneous administrative expense, $75. Record any missing funds in the cash short and over account.
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a) Petty Cash 500Cash 500
b) Office Supplies 300Miscellaneous Admin. Expense 75Cash Short and Over 5
Cash 380
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Describe and illustrate the reporting of cash
and cash equivalents in the financial statements.
Objective 7
Objective 7
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A company’s excess cash is normally invested in
highly liquid investments. These investments are
called cash equivalents.
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Companies that have invested excess cash in cash equivalents usually report cash
and cash equivalents as one
amount on the balance sheet.
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Banks may require depositors to maintain
minimum cash balances in their bank accounts.
Such a balance is called a compensating
balance.
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Summary
Internal Controls & Cash
Bank Reconcilations
Petty Cash & Special Cash
Funds
Cash Equivalents