1 © copyright doug hillman 2000 internal control and cash
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2© Copyright Doug Hillman 2000
Internal Control
Policies and procedures for protecting assets from improper use
3© Copyright Doug Hillman 2000
Internal Control
Policies and procedures for protecting assets from improper use and for the detection and prevention of errors or irregularities in accounting
4© Copyright Doug Hillman 2000
Elements of the Internal Control Structure
Control Environment Accounting System Control Procedures
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Control Environment
Management’s philosophy and operating style
Organizational structure Audit committee of board of directors Assigning authority and responsibility Controlling performance Policies and practices
6© Copyright Doug Hillman 2000
Accounting System
Identification and recording of all valid transactions
Proper classification of transactions Proper measurement of dollar amount Assignment to proper period Proper presentation in financial
statements and notes
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Control Procedures
Proper authorization of transactions and activities
Separation of duties Documents and records Safeguard over access to assets and
records Review of internal control system
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Cash
Deposits in checking and savings accounts and any item bank customarily accepts for immediate deposit
Challenge is to control inflows and outflows of cash
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Internal Control of Cash
Clear separation of duties and responsibilities among those who handle and account for cash
Proper equipment Proper authorization for payment Organization of flow so that work of one
person checked by another Periodic testing of controls
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Petty Cash Fund
Special fund of cash used for small payments
Establishment
» Imprest amount debited to asset account Petty Cash
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Petty Cash Fund
Expenditures
» No entry
» Evidenced by petty cash voucher Replenishment
» Check written to bring fund back to imprest amount
» Record expenses evidenced by petty cash vouchers
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Petty Cash Fund
Cash Over and Short
» When amount to replenish does not equal vouchers
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Bank Checking Account
Monthly bank statement conceptually a mirror image of company’s cash account
Timing differences in recording of deposits and clearing of checks causes difference in balance between bank and books.
Requires reconciliation
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Bank Reconciliation
Uses a record of an independent organization to prove the company’s records
Shows the items that account for the difference between Cash account balance and bank statement balance.
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Bank Reconciliation Procedures
Compare deposits shown on bank statement with debits to Cash» Deposits late in period not on bank
statement are deposits in transit Compare checks clearing bank with
credits to Cash» Checks not clearing bank are checks
outstanding
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Bank Reconciliation Procedures
Compare bank debit and credit memos to books to see if they have been recorded
List any errors as amounts are compared
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Bank Reconciliation Per Books
Add increases in cash already recorded by bank but not book
Deduct decreases in cash already recorded by bank but not book
Add or deduct errors on books
18© Copyright Doug Hillman 2000
Bank Reconciliation Per Bank
Add increases in cash recorded on book but not bank
» Deposits in transit Deduct decreases in cash already
recorded on books but not bank
» Checks outstanding Add or deduct errors by bank
19© Copyright Doug Hillman 2000
Bank Reconciliation
Journalize reconciling items from book side not recorded
Reconciliation not complete until all items have cleared
May take several months before we know that a specific month’s adjusted balance is in fact correct
20© Copyright Doug Hillman 2000
Analyzing Information
Is balance higher or lower than previous year?
What restrictions exist on cash?
» Compensating balances Where is cash invested?
21© Copyright Doug Hillman 2000
Comprehensive Analysis Case: Income Statement
Are total revenues higher or lower? What is percent change in revenues? Is percent of cost of goods sold to total
revenues increasing or decreasing? Is percent of total operating expenses to
total revenues increasing or decreasing? Is percent of net income to total revenues
increasing or decreasing?
22© Copyright Doug Hillman 2000
Comprehensive Analysis Case: Balance Sheet
Are total assets higher or lower? What is percent change in total assets? What are largest asset investments? Are largest asset investments increasing
faster or slower than percent change in total revenues?
Is percent total liabilities to total liabilities plus owners’ equity increasing or decreasing?
23© Copyright Doug Hillman 2000
Comprehensive Analysis Case: Integrative
Is the company operating more or less efficiently using the least amount of assets to generate a given level of total revenues
Compute total asset turnover
24© Copyright Doug Hillman 2000
Comp. Analysis Case: Short-term Liquidity Ratios
Current ratio Quick ratio Accounts receivable turnover Inventory turnover Is ration better or worse than previous
year?
25© Copyright Doug Hillman 2000
Comp. Analysis Case: Profitability Ratio
Return on total assets
» Profit margin
» Total asset turnover Is ROA better or worse than prior years?