5-1 electronic presentation by douglas cloud pepperdine university carl s.warren survey of...
TRANSCRIPT
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Electronic Presentation by Douglas Cloud
Pepperdine University
Electronic Presentation by Douglas Cloud
Pepperdine University
Carl S.Warren
Survey of Accounting
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Task Force Clip Art Task Force Clip Art included in this electronic included in this electronic presentation is used with presentation is used with
the permission of New the permission of New Vision Technology of Vision Technology of
Nepean Ontario, Canada.Nepean Ontario, Canada.
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Internal Control and Cash
Chapter 5
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1. Describe and illustrate the objectives and elements of internal control.
2. Describe and illustrate methods of preventing and detecting employee fraud.
3. Describe and illustrate the application of internal controls to cash.
4. Describe the nature of a bank account and its use in controlling cash.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
ContinuedContinuedContinuedContinued
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5. Describe and illustrate the use of a bank reconciliation in controlling cash.6. Describe the accounting for special-purpose cash funds.7. Describe and illustrate the reporting of cash and cash equivalents in the
financial statements.8. Describe, illustrate, and interpret the cash flow to net income ratio and the
cash to monthly cash expenses ratio.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
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1Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
Describe and illustrate the objectives and elements of internal control.
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Internal controls help businesses guide their
operations and prevent abuses.
Internal controls help businesses guide their
operations and prevent abuses.
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Objectives of Internal ControlObjectives of Internal ControlObjectives of Internal ControlObjectives of Internal Control
1. Assets are safeguarded and used for business purposes.
2. Business information is accurate.
3. Employees comply with laws and regulations.
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Control EnvironmentControl EnvironmentControl EnvironmentControl EnvironmentThe control environment is
the overall attitude of management and
employees about the importance of controls.
The control environment is the overall attitude of
management and employees about the
importance of controls.
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Risk AssessmentRisk AssessmentRisk AssessmentRisk Assessment
Changes in customer requirements
Competitive threats Changes in economic factors Employee violations of
company policies and procedures
Risk includes:Risk includes:
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Control ProceduresControl ProceduresControl ProceduresControl Procedures
Control procedures are established to provide reasonable assurance that
business goals will be achieved, including the prevention of fraud.
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Control ProceduresControl ProceduresControl ProceduresControl Procedures
Competent personnel Rotating duties Mandatory vacations Separating responsibilities for related
operations Separate operations Custody of assets Accounting proofs Security measures Monitoring the internal control system
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Security MeasuresSecurity MeasuresSecurity MeasuresSecurity Measures
Locate the cash register near the door, so that it is fully visible from outside the store.
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Security MeasuresSecurity MeasuresSecurity MeasuresSecurity Measures
Have two employees work late
hours.
Employ a security guard
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Security MeasuresSecurity MeasuresSecurity MeasuresSecurity Measures
Deposit cash in bank daily before 5 p.m.
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Security MeasuresSecurity MeasuresSecurity MeasuresSecurity Measures
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.
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Security MeasuresSecurity MeasuresSecurity MeasuresSecurity Measures
Install cameras and alarm systems.
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Warning Signs With Warning Signs With Regard to PeopleRegard to People
Warning Signs With Warning Signs With Regard to PeopleRegard to People
1. Abrupt change in lifestyle.
2. Close social relationship 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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Warning Signs From the Warning Signs From the Accounting SystemAccounting System
Warning Signs From the Warning Signs From the Accounting SystemAccounting System
1. Missing documents or gaps in transaction numbers.
2. An unusual increase in customer fraud.
3. Differences between daily cash receipts and bank deposits.
4. Sudden increase in slow payments.
5. Backlog in record transactions.
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Describe and illustrate methods of preventing and detecting employee fraud.2
Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
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Elements Common to Most Elements Common to Most Employee FraudEmployee Fraud
Elements Common to Most Elements Common to Most Employee FraudEmployee Fraud
An employee’s perceived financial need
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Elements Common to Most Elements Common to Most Employee FraudEmployee Fraud
Elements Common to Most Elements Common to Most Employee FraudEmployee Fraud
An opportunity to use a fraudulent scheme to satisfy the need
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Elements Common to Most Elements Common to Most Employee FraudEmployee Fraud
Elements Common to Most Elements Common to Most Employee FraudEmployee Fraud
A rationalization that the fraud is justified
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Preventive ControlsPreventive ControlsPreventive ControlsPreventive Controls
Company Assets
The company assets should be
controlled in such a way that an employee’s
ability to steal the assets is limited.
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Preventive ControlsPreventive ControlsPreventive ControlsPreventive Controls
Proper authorization and approval
procedures can be effectively
used to prevent employee fraud.
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Detective ControlsDetective ControlsDetective ControlsDetective Controls
Periodic reviews of the accounting records are useful in identifying unusual transactions or accounts for further investigation.
Independent checks are useful in detecting employee fraud.
Reconciliations are useful in detecting employee theft.
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Risk Factors Relating to Risk Factors Relating to Employee FraudEmployee Fraud
Risk Factors Relating to Risk Factors Relating to Employee FraudEmployee Fraud
Lack of proper record keeping for assets susceptible to theft.
Lack of proper segregation of duties.
Lack of independent checks.
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Risk Factors Relating to Risk Factors Relating to Employee FraudEmployee Fraud
Risk Factors Relating to Risk Factors Relating to Employee FraudEmployee Fraud
Lack of a proper system of authorization.
Lack of proper physical safeguarding of assets susceptible to theft.
Lack of timely and proper documentation for transactions.
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Risk Factors Relating to Risk Factors Relating to Employee FraudEmployee Fraud
Risk Factors Relating to Risk Factors Relating to Employee FraudEmployee Fraud
Lack of a proper management oversight.
Lack of proper screening procedures for employees in sensitive positions.
Lack of mandatory vacations for employees in sensitive position.
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Describe and illustrate the application of internal controls to cash.
3Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
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What is Cash?Cash includes coins,
currency (paper money), checks,
money orders, and money on deposit
that is available for unrestricted withdrawal.
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Control of Cash ReceiptsControl of Cash ReceiptsControl of Cash ReceiptsControl of Cash Receipts
One of the most important controls
to protect cash received in over-the-counter sales
is the cash register.
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Control of Cash ReceiptsControl of Cash ReceiptsControl of Cash ReceiptsControl of Cash Receipts
After a cash register clerk’s cash has been
counted and recorded on a memorandum form, the cash is then placed in a store safe until it can be deposited in the bank.
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Control of Cash ReceiptsControl of Cash ReceiptsControl of Cash ReceiptsControl of Cash Receipts
The employee who opens the mail should initially compare the
amount of cash received with the amount shown
on the remittance advice.
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Control of Cash ReceiptsControl of Cash ReceiptsControl of Cash ReceiptsControl of Cash Receipts
The employee opening the mail normally also stamps the checks and
money orders “For Deposit Only” in the bank account of the
business.
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Control of Cash ReceiptsControl of Cash ReceiptsControl of Cash ReceiptsControl of Cash Receipts
When cash is deposited in the bank, the bank cashier
normally stamps a duplicate copy of the
deposit ticket. This bank receipt is returned to the
Accounting Department for comparison and recording.
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Control of Cash PaymentsControl of Cash PaymentsControl of Cash PaymentsControl of Cash Payments
A voucher system is a set of procedures for authorizing
and recording liabilities and cash payments.
A voucher system is a set of procedures for authorizing
and recording liabilities and cash payments.
A voucher is any document that serves as proof of authority to pay cash.
A voucher is any document that serves as proof of authority to pay cash.
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Describe the nature of a bank account and its use in controlling cash.4
Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
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A summary of all checking account transactions, called a bank statement, is mailed to
the depositor each month.
A summary of all checking account transactions, called a bank statement, is mailed to
the depositor each month.
It shows the beginning It shows the beginning balance, additions, balance, additions,
deductions, and the balance at deductions, and the balance at the end of the period.the end of the period.
It shows the beginning It shows the beginning balance, additions, balance, additions,
deductions, and the balance at deductions, and the balance at the end of the period.the end of the period.
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Businesses usually require that all cash receipts be initially deposited in the
bank account.
Businesses usually require that all cash receipts be initially deposited in the
bank account.
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Likewise, businesses usually use checks or bank account transfers to make
all cash payments.
Likewise, businesses usually use checks or bank account transfers to make
all cash payments.
Except very small ones.Except very small ones.Except very small ones.Except very small ones.
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Describe and illustrate the use of a bank reconciliation in controlling cash.5
Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
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A bank reconciliation is a listing of the items and amounts that cause the
cash balance reported in the bank statement…
A bank reconciliation is a listing of the items and amounts that cause the
cash balance reported in the bank statement…
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…to differ from the balance of the cash
account in the ledger.
…to differ from the balance of the cash
account in the ledger.
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Steps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank Reconciliation
1. Compare cash deposit listed on the bank statement with unrecorded deposits appearing in the preceding period’s reconciliation and with deposit receipts or other records of deposits.
Cash balance according to bank statement:Add deposits not on bank statement
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Steps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank Reconciliation
2. Compare paid checks with outstanding checks appearing on the preceding period’s reconciliation and with recorded checks.
Cash balance according to bank statement:Deduct outstanding checks:
No. 1512xxx
No. 1515xxx
No. 1521xxxx
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Steps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank Reconciliation
3. Compare bank credit memorandums to the accounting records.
Cash balance according to depositor’s record:
Add note and interest collect by bank
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Steps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank Reconciliation
4. Compare bank debit memorandums to records of cash payments.
Cash balance according to depositor’s record:Deduct: Check returned because of
insufficient funds Bank service charge
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Steps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank Reconciliation
5. List any errors discovered during the preceding steps.
Cash balance according to depositor’s record:Deduct: Error in recording Check No. 1509
Assume that Check No. 1509 was written for $193 and recorded as $139.
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Typical Journal EntriesTypical Journal EntriesTypical Journal EntriesTypical Journal Entries
Entries are based only on the information from the depositor’s side of the Entries are based only on the information from the depositor’s side of the reconciliation.reconciliation.
Entries are based only on the information from the depositor’s side of the Entries are based only on the information from the depositor’s side of the reconciliation.reconciliation.
Liabilities31-Jul A/P - 9
Net Effect -9
Revenue Net Income31-Jul Int. Inc. 8 -10
Net Effect 8 -10
Trans. Date
Trans. Date
Income StatementExpense
Misc. Expense 18
18
-19 -10
Ret. Earnings (Net Income)
Notes Rec. - 400
Accts. Rec. 300
Balance SheetAssets Stockholders' Equity
Cash 81
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Describe the accounting for special-purpose cash funds.6
Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
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It is usually not practical for a business to write checks to pay small
amounts, like postage.
It is usually not practical for a business to write checks to pay small
amounts, like postage.
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To control these small payments, a petty cash fund is used. This is a small cash fund under the control of a
petty cashier.
To control these small payments, a petty cash fund is used. This is a small cash fund under the control of a
petty cashier.
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If a secretary needs a book of stamps, the secretary signs a
voucher that provides a description and amount in
exchange for the necessary cash.
If a secretary needs a book of stamps, the secretary signs a
voucher that provides a description and amount in
exchange for the necessary cash.
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The petty cashier places the voucher in a locked
drawer for later reconciliation and
recording.
The petty cashier places the voucher in a locked
drawer for later reconciliation and
recording.
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Most businesses use a payroll bank account to pay
employees. This is known as a special-purpose fund.
Most businesses use a payroll bank account to pay
employees. This is known as a special-purpose fund.
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Describe and illustrate the reporting of cash and cash equivalents in the financial statements.
7Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
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A company may have cash in excess of operating needs. These funds are placed in
highly liquid investments and are called cash equivalents.
A company may have cash in excess of operating needs. These funds are placed in
highly liquid investments and are called cash equivalents.
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Examples of Cash EquivalentsExamples of Cash EquivalentsExamples of Cash EquivalentsExamples of Cash Equivalents
Commercial paper Certificates of deposit U.S. government and agency
securities Corporate notes and bonds Municipal securities
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Describe, illustrate, and interpret the cash flow to net income ratio and the cash to monthly cash expense ratio.
8Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
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Ratio of Cash Flow to Ratio of Cash Flow to Net IncomeNet Income
Ratio of Cash Flow to Ratio of Cash Flow to Net IncomeNet Income
$151,250
$83,725
Net cash flow from
operations
Net cash flow from
operations
From the statement of cash flows
From the statement of cash flows
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Ratio of Cash Flow to Ratio of Cash Flow to Net IncomeNet Income
Ratio of Cash Flow to Ratio of Cash Flow to Net IncomeNet Income
$151,250
$83,725 Net incomeNet incomeFrom the income
statement
From the income
statementCash flow ratio = 1.81
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Ratio of Cash to Monthly Ratio of Cash to Monthly Cash ExpensesCash Expenses
Ratio of Cash to Monthly Ratio of Cash to Monthly Cash ExpensesCash Expenses
Cash at the end of the year
Cash at the end of the year
$38,450
$12,604
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Ratio of Cash to Monthly Ratio of Cash to Monthly Cash ExpensesCash Expenses
Ratio of Cash to Monthly Ratio of Cash to Monthly Cash ExpensesCash Expenses
$38,450
$12,604
Net cash flow from
operations per month
Net cash flow from
operations per month
From the statement of cash flows
From the statement of cash flows
$151,250
12= $12,604
Ratio of cash to Ratio of cash to monthly expenses monthly expenses
= 3.05= 3.05
Ratio of cash to Ratio of cash to monthly expenses monthly expenses
= 3.05= 3.05
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The EndThe End
Chapter 5Chapter 5
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