Study
Study Objectives
Objectives
Internal Control
and Cash
Chapter
7-1
Chapter
7-2
Fraud
Fraud and
and Internal
Internal Control
Control
Fraud
The SarbanesSarbanes-Oxley Act
Define fraud and internal control.
2.
Identify the principles of internal control activities.
3.
Explain the applications of internal control principles to cash
receipts.
4.
Explain the applications of internal control principles to cash
disbursements.
5.
Prepare a bank reconciliation.
6.
Explain the reporting of cash.
7.
Discuss the basic principles of cash management.
8.
Identify the primary elements of a cash budget.
9.
Explain the operation of a petty cash fund.
Chapter
7-3
Financial Accounting, Fifth Edition
Fraud
Fraud and
and Internal
Internal Control
Control
1.
Fraud
Fraud and
and Internal
Internal Control
Control
2002
(SOX)
A dishonest act by an employee that results in
personal benefit to the employee at a cost to the
employer.
Companies must
Three factors
that contribute to
fraudulent activity.
Independent auditors must attest to the level of
internal control.
Internal Control
Methods and measures adopted to:
develop principles of control over financial reporting.
1. Safeguard assets.
continually verify that controls are working.
SOX created the
2. Enhance accuracy and reliability of accounting
records.
3. Increase efficiency of operations.
www.pcaob.com
4. Ensure compliance with laws and regulations.
Illustration 7-1
Chapter
7-4
SO 1 Define fraud and internal control.
Chapter
7-5
SO 1 Define fraud and internal control.
Chapter
7-6
SO 1 Define fraud and internal control.
Fraud
Fraud and
and Internal
Internal Control
Control
Fraud
Fraud and
and Internal
Internal Control
Control
Fraud
Fraud and
and Internal
Internal Control
Control
Internal Control
Principles of Internal Control Activities
Principles of Internal Control Activities
Five Primary Components:
Control is most effective when only one person is
responsible for a given task.
1. Control environment.
2. Risk assessment.
Segregation of Duties
3. Control activities.
Physical
Controls
Related duties should be assigned to different individuals.
4. Information and communication.
5. Monitoring.
Chapter
7-7
Illustration 7-2
Establishment of Responsibility
Documentation Procedures
Companies should use prenumbered documents and all
documents should be accounted for.
SO 1 Define fraud and internal control.
Chapter
7-8
SO 2 Identify the principles of internal control activities.
Chapter
7-9
SO 2 Identify the principles of internal control activities.
Fraud
Fraud and
and Internal
Internal Control
Control
Principles of Internal Control Activities
Independent Internal Verification
1. Records periodically verified by an employee who is
independent.
2. Discrepancies reported to management.
Human Resource Controls
1. Bond employees.
2. Rotate employees’ duties and require vacations.
3. Conduct background checks.
Chapter
7-10
SO 2 Identify the principles of internal control activities.
Chapter
7-13
Fraud
Fraud and
and Internal
Internal Control
Control
Limitations of Internal Control
Chapter
7-11
Chapter
7-12
Chapter
7-14
Chapter
7-15
Cash
Cash Controls
Controls
Cash Receipts Controls
Documentation
Procedures
Use remittance
advice (mail
receipts), cash
register tapes, and
deposit slips
Independent Internal
Verification
Supervisors count cash
receipts daily;
treasurer compares
total receipts to bank
deposits daily
Segregation of Duties
Different individuals
receive cash, record
cash receipts, and hold
the cash
Physical,
Mechanical, and
Electronic Controls
Store cash in safes
and bank vaults; limit
access to storage
areas; use cash
registers
Human Resource
Controls
Bond personnel who
handle cash; require
employees to take
vacations; conduct
background checks
Human element.
Size of the business.
SO 2 Identify the principles of internal control activities.
Illustration 7-4
Establishment of
Responsibility
Only designated
personnel are
authorized to handle
cash receipts
(cashiers)
Costs should not exceed benefit.
Chapter
7-16
Mail
Mail Receipts
Receipts
Chapter
7-17
SO 3 Explain the applications of internal control principles to cash receipts.
Control Procedures:
Mail receipts should be opened by two people, a list
prepared, and each check endorsed.
Each mail clerk signs the list to establish responsibility
for the data.
Original copy of the list, along with the checks, is sent
to the cashier’s department.
A copy of the list is sent to the accounting department
for recording. The clerks also keep a copy.
Chapter
7-18
SO 3 Explain the applications of internal control principles to cash receipts.
Cash
Cash Controls
Controls
Cash
Cash Controls
Controls
Cash
Cash Controls
Controls
Review Question
Cash Disbursements Controls
Permitting only designated personnel to handle cash
receipts is an application of the principle of:
Generally, internal control over cash disbursements
is more effective when companies pay by check,
rather than by cash.
a. segregation of duties.
Applications:
b. establishment of responsibility.
Voucher system
c. independent check.
Petty cash fund
d. other controls.
Establishment of
Responsibility
Cash Disbursements Controls
Independent Internal
Verification
Compare checks to
invoices; reconcile bank
statement monthly
Physical, Mechanical,
and Electronic
Controls
Store blank checks in
safes, with limited
access; print check
amounts by machine in
indelible ink
Documentation
Procedures
Use prenumbered
checks and account for
them in sequence;
each check must have
an approved invoice;
require employees to
use corporate credit
cards for reimbursable
expenses; stamp
invoices "paid."
Only designated
personnel are
authorized to sign
checks (treasurer)
Segregation of Duties
Different individuals
approve and make
payments; check
signers do not record
disbursements
Illustration 7-6
Chapter
7-19
SO 3 Explain the applications of internal control principles to cash receipts.
Cash
Cash Controls
Controls
SO 4 Explain the applications of internal control
principles to cash disbursements.
Chapter
7-20
Cash
Cash Controls
Controls
Review Question
Contributes to good internal control over cash.
Voucher System
Minimizes the amount of currency on hand.
Network of approvals, by authorized
individuals, to ensure all disbursements by
check are proper.
a. establishment of responsibility.
b. segregation of duties.
SO 4 Explain the applications of internal
control principles to cash disbursements.
Control
Control Features:
Features: Use
Use of
of aa Bank
Bank
Cash Disbursements Controls
The use of prenumbered checks in disbursing cash is
an application of the principle of:
Chapter
7-21
Human Resource
Controls
Bond personnel who
handle cash; require
employees to take
vacations; conduct
background checks
Creates a double record of bank transactions.
Bank reconciliation.
A voucher is an authorization form prepared
for each expenditure.
c. physical, mechanical, and electronic controls.
d. documentation procedures.
SO 4 Explain the applications of internal control
principles to cash disbursements.
Chapter
7-22
Control
Control Features:
Features: Use
Use of
of aa Bank
Bank
Bank Statements
Illustration 7-7
Chapter
7-24
Control
Control Features:
Features: Use
Use of
of aa Bank
Bank
Control
Control Features:
Features: Use
Use of
of aa Bank
Bank
Review Question
Reconciling the Bank Account
The control features of a bank account do not
include:
Debit Memorandum
Bank service charge
a. having bank auditors verify the correctness of
the bank balance per books.
NSF (not sufficient
funds)
Reconcile balance per books and balance per bank to
their adjusted (corrected) cash balances.
Reconciling Items:
1. Deposits in transit.
b. minimizing the amount of cash that must be kept
on hand.
Credit Memorandum
Collect notes
receivable.
2. Outstanding checks.
c. providing a double record of all bank
transactions.
Interest earned.
Chapter
7-25
SO 4 Explain the applications of internal control
principles to cash disbursements.
Chapter
7-23
3. Bank memoranda.
4. Errors.
d. safeguarding cash by using a bank as a
depository.
Chapter
7-26
Time Lags
Chapter
7-27
SO 5 Prepare a bank reconciliation.
Control
Control Features:
Features: Use
Use of
of aa Bank
Bank
Control
Control Features:
Features: Use
Use of
of aa Bank
Bank
Reconciliation Procedures
+ Notes collected by bank
-
-
NSF (bounced) checks
-
Check printing or other
service charges
+/- Bank Errors
Illustration: Prepare a bank reconciliation at April 30.
Illustration 7-8
+ Deposit in Transit
Outstanding Checks
Control
Control Features:
Features: Use
Use of
of aa Bank
Bank
Advertising
expense
Cash balance per bank statement
$15,907.45
Cash balance per books
$11,589.45
+/- Book Errors
CORRECT BALANCE
Chapter
7-28
CORRECT BALANCE
SO 5 Prepare a bank reconciliation.
Chapter
7-29
SO 5 Prepare a bank reconciliation.
Control
Control Features:
Features: Use
Use of
of aa Bank
Bank
Control
Control Features:
Features: Use
Use of
of aa Bank
Bank
Illustration: Journalize the adjusting entries at April 30
on the books of Laird Company.
Review Question
Dr.
Chapter
7-30
SO 5 Prepare a bank reconciliation.
Reporting
Reporting Cash
Cash
Most liquid asset, listed first.
The reconciling item in a bank reconciliation that will
Cr.
Illustration 7-11
result in an adjusting entry by the depositor is:
Apr. 30
a. outstanding checks.
b. deposit in transit.
c. a bank error.
d. bank service charges.
Chapter
7-31
SO 5 Prepare a bank reconciliation.
Chapter
7-32
Cash equivalents
SO 5 Prepare a bank reconciliation.
Reporting
Reporting Cash
Cash
Managing
Managing and
and Monitoring
Monitoring Cash
Cash
Review Question
Basic Principles of Cash Management
Which of the following statements correctly
describes the reporting of cash?
1.
Increase the speed of receivables collection.
a. Cash cannot be combined with cash equivalents.
2.
Keep inventory levels low.
b. Restricted cash funds may be combined with
Cash.
3.
Delay payment of liabilities.
4.
Plan the timing of major expenditures.
5.
Invest idle cash.
c. Cash is listed first in the current assets section.
d. Restricted cash funds cannot be reported as a
current asset.
Chapter
7-34
SO 6 Explain the reporting of cash.
Chapter
7-35
SO 7 Discuss the basic principles of cash management.
Chapter
7-33
Restricted cash
SO 6 Explain the reporting of cash.
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Chapter
7-36