Internal Control & Cash

1. Internal Control & Cash Chapter 8

2. Objective 1 Define internal control

3. Internal Control All policies and procedures managers use to: • Safeguard assets • Encourage employees to follow company policies • Promote operational efficiency • Ensure accurate, reliable accounting records

4. Sarbanes-Oxley Act • Public companies must issue internal control report • Independent auditor must evaluate internal controls • Created Public Company Accounting Oversight Board – oversees work of auditors of public companies

5. Sarbanes-Oxley Act • Accounting firms may not both audit and provide certain consulting services for the same client • Established penalties for violators

6. Objective 2 Describe good internal control procedures

7. Components of Internal Control • Control environment – management sets the tone • Assess risks • Control procedures – designed to ensure that company’s goals are achieved • Monitor controls – internal auditors • Maintain appropriate information system

8. Principles of Internal Control • Competent, reliable and ethical personnel • Hire • Train • Supervise • Assignment of responsibilities – each employee has clearly defined responsibilities

9. Principles of Internal Control • Separation of duties - limits fraud, promotes accurate financial statements • Separate operations from accounting • Separate custody of assets from accounting • Audit – examination of company’s financial statements and accounting system • Internal auditors • External auditors

10. Principles of Internal Control • Documents • Electronic Devices • Other

11. Internal Controls for E-Commerce Pitfalls • Stolen credit card numbers • Computer viruses and Trojans • Phishing Security Measures • Encryption • Firewalls

12. The Limitations of Internal Control • Collusion - when two or more employees work together to defraud the company • Solution – add more internal control • Always consider cost/benefit of controls

13. Objective 3 Prepare a bank reconciliation and the related journal entries

14. Bank Reconciliation • Explains all differences between general ledger cash account and bank statement cash balance • Deposits in transit • Outstanding checks • Bank or book errors • EFT’s • Service charges • NSF checks

15. Bank Statement Add: Deduct: Adjusted bank balance Book Balance Add: Deduct: Adjusted book balance Any increase (decrease) to cash that has been recorded in the books, but does not appear on the bank statement Bank Reconciliation Any increase (decrease) to cash that has been recorded by the bank, but has not been recorded in the books yet

16. Bank Statement Add: Deposits in transit. Deduct: Outstanding checks Add or Deduct: Bank errors Book Balance Add: Interest revenue Add: Bank collections Deduct: Nonsufficient funds check (NSF) Deduct: Service charges Add or Deduct: Book errors, EFT transfers Reconciling Items

17. Bank balance $3,800 Add: Deposits in transit 200 $4,000 Deduct: Outstanding checks 900 Reconciled bank balance $3,100 The company has recorded the cash receipts, but the bank does not show the deposit yet S8-6 The company has recorded the cash disbursements, but the checks have not yet cleared the bank

18. Book balance $2,480 Add: Bank collection from customer 630 Interest revenue 10 Subtotal $3,120 Deduct: Bank service charge 20 Reconciled book balance $3,100 S8-6 These items appear on the bank statement, but the company has not yet recorded them

19. Bank balance $3,800 Add: Deposits in transit 200 $4,000 Deduct: Outstanding checks 900 Reconciled bank balance $3,100 Book balance $2,480 Add: Collection from customer 630 Interest revenue 10 Subtotal $3,120 Deduct: Service charge 20 Reconciled book balance $3,100 S8-6 Ranger Security Systems Bank Reconciliation May 31, 2007

20. Book balance $2,480 Add: Bank collection from customer 630 Interest revenue 10 Subtotal $3,120 Deduct: Bank service charge 20 Reconciled book balance $3,100 Remember, you only need to prepare entries for any adjustment to the Book Balance Adjusting the Books Any reconciling item under “Book Balance” requires a journal entry to adjust the Cash account

21. S8-7 May 31 Cash 630 Accounts Receivable- K. Brooks 630 Bank collection from customer 31 Cash 10 Interest Revenue 10 Interest earned on bank balance

22. S8-7 May 31 Miscellaneous Expense 20 Cash 20 Bank service charge

23. Objective 4 Apply internal controls to cash receipts

24. Cash Receipts Over the Counter • Receipt is issued for each transaction • Cash drawer opens when a transaction is entered • At the end of a shift, manager proves cash by comparing cash in drawer with machine’s record of sales • At least once a day, cashier deposits cash in bank • Register tape sent to accounting department

25. Cash Receipts by Mail • Incoming mail opened by a mailroom employee. • This person compares the check received with the remittance advice • Receipts sent to treasurer and cashier deposits money in bank • Remittance advice sent to accounting for journal entries • Controller compares records of the day’s • Bank deposit amount from treasurer • Debit to Cash from accounting

26. Objective 5 Apply internal controls to cash payments

27. Controls Over Purchase and Payment • Send purchase order to supplier – purchasing agent • Receive inventory and invoice – receiving department • Prepare receiving report – receiving department • Make sure all documents agree – treasurer or controller • Issue check – treasurer or controller

28. Voucher System • Voucher – document authorizing a cash payment • Voucher register – similar to a purchases journal • Check register – similar to cash payments journal

29. Petty Cash • Cash fund kept on hand to pay for small expenditures • Designate a custodian of petty cash fund • Keep a specific amount of cash on hand • All fund payments are supported with a petty cash ticket

30. Petty Cash We are using E8-22 to illustrate the petty cash system Establish Petty System May 1 Petty Cash 200 Cash 200

31. Making Payments A numbered ticket is prepared for each expenditure Petty Cash Ticket No. 15 Date: _________________ Amount: ________________ Paid to: _______________ For: ___________________ Approved by: ____________ Payment received by: _____________ Debit Account No.: _________ $8.00 May 2, 2007 Foster’s Office Supply Office Supplies Sharon Kahl Carol Miller Supplies Expense – Account No. 615

32. Petty Cash Ticket No. 15 Date: _________________ Amount: ________________ Paid to: _______________ For: ___________________ Approved by: ____________ Payment received by: _____________ Debit Account No.: _________ $8.00 May 2, 2007 Foster’s Office Supply Office Supplies Sharon Kahl Carol Miller 615 Petty Cash Making Payments

33. Replenish Petty Cash • Using information on vouchers, record expenses in journal • A new check is cashed for total amount of expenses • Cash is placed in petty cash box

34. Replenish Petty Cash Fund May 31 Delivery Expense 22 Postage Expense 42 Supplies Expense 42 Miscellaneous Expense 16 Cash 122 Replenish petty cash fund

35. Cash Short and Over • Account used whenever a cash fund is short or over • May have either a debit or credit balance • Reported as miscellaneous expense or revenue depending on ending balance • Closed at the end of the accounting period to income summary

36. Objective 6 Make ethical business judgments

37. Framework for Making Ethical Decisions • What is the ethical issue? • What are the options? • What are the possible consequences? • What shall I do?

38. End of Chapter 8