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Chapter 10

Chapter 10. Internal Control and Cash. 10-1 Principles of Internal Control. Establishment of responsibility Segregation of duties Documentation procedures Physical, mechanical, and electronic controls Independent internal verification Other controls.

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Chapter 10

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  1. Chapter 10 Internal Control and Cash

  2. 10-1 Principles of Internal Control Establishment of responsibility Segregation of duties Documentation procedures Physical, mechanical, and electronic controls Independent internal verification Other controls

  3. 10-2 Application of Internal Control to Cash Receipts Establishment of Responsibility Only designated personnel are authorized to handle cash receipts (cashiers) Physical, Mechanical, and Electronic Controls Store cash in safes and bank vaults; limit access to storage areas; use cash registers Segregation of Duties Different individuals receive cash, record cash receipts, and hold the cash Independent Internal Verification Supervisors count cash receipts daily; treasurer compares total receipts to bank deposits daily Documentation Procedures Use remittance advice (mail receipts), cash register tapes, and deposit slips Other Controls Bond personnel who handle cash; require employees to take vacations; deposit all cash in bank daily

  4. 10-3 Application of Internal Control to Cash Disbursements Establishment of Responsibility Only designated personnel authorized to sign checks (treasurer) Physical, Mechanical, and Electronic Controls Store blank checks in safes, with limited access; print check amounts by machine in indelible ink Segregation of Duties Different individuals approve and make payments; check signers do not record disbursements Independent Internal Verification Compare checks to invoices; reconcile bank statement monthly Documentation Procedures Use prenumbered checks and account for them in sequence; each check must have approved invoice Other Controls Stamp invoices PAID

  5. 10-4 Bank Reconciliation Format Differences Caused By 1. Time lags 2. Errors Prepare Adjusting Entries to Correct Books Balances Should Agree

  6. 10-5 Preparing the Bank Reconciliation CM – Represents $725 Note Receivable collection plus interest revenue of $50 less bank charges of $25. NSF represents $125 check from ABC Company deposited on 6/20. HINT: One error was made in recording disbursements. • Procedures for Finding Differences between Bank and Book Balances: • Examine last month’s bank reconciliation and list items that have not change, i.e., outstanding checks from prior month which have not cleared (again) or other reconciling items which were not corrected (bank service charges). • Compare all recorded disbursements per books to bank debits (charges) and list differences. • Compare all recorded receipts per books to bank credits and list differences. • Prepare bank reconciliation from data collected.

  7. 10-5 Preparing the Bank Reconciliation (continued) Prepare adjusting entries to adjust cash balance per books to adjusted balance per books. Bank Reconciliation Adjusting Entries Bank collects a $725 Notes Receivable and $50 Interest Revenue less $25 for bank charges (net $750). Book error of $90 resulted from recording check No. 217 as $560 when actual check amount and invoice amounted to $650 (XYZ Co. – Accounts Payable). Bank service charges of $6. NSF check for $125 from ABC Company returned by bank.

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