chapter 4 internal control cash

8/3/2019 Chapter 4 Internal Control Cash

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Chapter 4Internal Control and Cash



Internal Control

Internal control is the organizational planand related measures that an entity

adopts to: Safeguard assets

Encourage adherence to company

policies Promote operational efficiency

Ensure accurate and reliable accountingrecords



Sarbanes-Oxley Act (SOX)

Created Public Company Accounting OversightBoard.

Prohibits accounting firms from both auditing

financial statements of a firm and providingcertain consulting services for the same client.

Requires periodic rotation of lead auditors.

Requires public companies to issue internalcontrol reports and the outside auditor toevaluate the client’s internal controls.

Provides stiff penalties for violators.



Internal Control SystemsGood internal control systems require:

Competent, reliable, ethical personnel

Assignment of responsibilities

Proper authorization Supervision of employees

Separation of duties separation of operations from accounting

separation of the custody of assets from accounting

Internal and external audits

Documents and records

Electronic and computer controls



E-Commerce Onion model of system security

Audits by external specialists

SensitiveHardware,Software,

and

Data

Incident response procedures

Intrusion detection devices

Firewalls

Encryption



E-Commerce

Encryption is the transformation of data by amathematical process into a form that isunreadable by those without a key.

Firewall limits access to hardware, software,or data to persons within a network.

Intrusion detection identifies unauthorizedentries to the system.

Incident response procedures apprehendhackers and remove them from the system.

External audits (WebTrust, SysTrust, CPAfirms, etc.) test e-commerce systems.



Other Controls

Fireproof vaults

Burglar alarms

Point-of-sale terminals

Fidelity bonds on cashiers and otherswho have access to cash

Mandatory vacations

Job rotation



Bank Accounts as Controls

All cash should be deposited into a bankaccount daily.

To draw money from the account, a check is

written Three parties to a check:

maker – signs the check

payee – to whom the check is written

bank – on which the check is drawn

Remittance advice is an optional attachmentthat gives the reason for the payment.



Bank Accounts as Controls

Monthly bank statements are sent tothe account holder and should be

reconciled. Electronic fund transfer (EFT) is the

electronic transfer of cash. No check

is written. Bank statements include both physical

checks and EFT payments as well as

other transactions on the account.



Bank Reconciliation

Two independently maintained recordsof a business’s cash

The company’s Cash account The bank statement

Differences between the two recordsgenerally arise because of timingdifferences.

Reconciliations ensure that the tworecords agree.



Bank Reconciliation

Items for reconciliation:

Items recorded by the company but

not yet recorded by the bank: Deposits in transit

Outstanding checks



Bank Reconciliation

Items for reconciliation: Items recorded by the bank but not yet

recorded by the company. Bank direct collections Electronic funds transfers not known by

Company Service charges and the cost of printed checks

Interest revenue earned on checking account Non-sufficient funds (NSF) checks

Errors by the company or the bank



Bank Reconciliation

The adjusted bank balance must equalthe adjusted books balance.



Reconciling Items

Bank Balance Add deposits in transit

Subtract outstandingchecks

Add or subtract corrections of bank

errors, as appropriate

Book Balance Add bank direct

collection items,interest revenue, andEFT receipts

Subtract servicecharges, NSF checks,

and EFT payments Add or subtract

corrections of bookerrors, as appropriate.



Bank Reconciliation

Journal entries are only made for:

Bank direct collection items, interest

revenue, and EFT receipts Service charges, NSF checks, and EFT

payments

Errors made by the company (bankerrors do not require journal entries onthe company’s books).



Bank ReconciliationBusiness Research, Inc.

Bank Reconciliation

January 31, 20X6

Bank

Balance, January 31 $5,931.51Add:1. Deposit of January 30

in transit 1,591.632. Correction of bank

error –

ResearchAssociates check 656erroneously chargedagainst companyaccount 100.00

7,623.14

Less: Outstanding ChecksNo. 337 $286.00No. 338 319.47No. 339 83.00No. 340 203.14No. 341 458.53 (1,350.14)

Adjusted bank balance $6,273.00

Books

Balance, January 31 $3,294.21Add:4. EFT receipt of rent

revenue 904.035. Bank Collection of note

receivable including interestrevenue of $214 2,114.00

6. Interest revenue earnedon bank balance 28.01

7. Correction of book error – overstated amount of check no. 333 360.00

6,700.25Less:8. Service charge $14.259. NSF check 52.00

10. EFT payment of insuranceexpense 361.00 (427.25)

Adjusted book balance $6,273.00



Journal Entries from Reconciliation

(4) Cash 904.03Rent Revenue 904.03

Receipt of monthly rent

(5) Cash 2,114.00Notes Receivable 1,900.00

Note receivable collected by the bank

Interest Revenue 214.00

(6) Cash 28.01Interest Revenue 28.01

Interest earned on bank balance



Journal Entries from Reconciliation

(7) Cash 360.00

Accounts Payable 360.00

Correction of check no. 333

(8) Miscellaneous Expense 14.25

Cash 14.25Bank Service Charge

(9) Accounts Receivable 52.00

Cash 52.00

NSF customer check returned by bank

(10) Insurance Expense 361.00

Cash 361.00

Payment of monthly insurance



Controlling Cash Receipts

Over-the-counter receipts Point of sale terminal

Mail Receipts

Lockbox Checks removed and totaled in mailroom.

Remittance advice to accounts receivable,checks to Treasurer for deposit. Controllercompares:

control total from mail room

bank deposit amount from cashier

debit to cash from accounting department



Controlling Cash Payments

Payment by check Purchase requisition (request)

Purchase order authorizes an order Payment packet matches

purchase order,

invoice, and receiving report

Payment packet should be cancelledto ensure that the invoice is not paid

twice.



Petty Cash

Petty cash fund is to pay for minorexpenses.

Fund is opened with a particular amount of

cash. A custodian issues cash when needed and

places all petty cash tickets and receipts inthe box with the remaining cash.

The sum of the remaining cash and pettycash tickets should equal the amountestablished for the fund.

Petty cash is an example of an imprest fund .



Cash Budgets

Budget – a financial plan

Cash budget plans cash receipts and cash

paymentsBeginning cash

Plus: Expected Receipts

Less: Expected Payments

Equals: Expected Ending cash

Allows mangers to know in advance whetherthey will likely need to borrow money.



Reporting Cash

Cash and Cash Equivalents

liquid assets such as time deposits and

certificates of deposit Restricted cash must be disclosed

separately.

Compensating balances are notincluded as cash.



Ethics

Corporate and Professional Codes ofEthics

Corporate Codes of Conduct AICPA Code of Professional Conduct

IMA Standards of Ethical Conduct for

Management Accountants Ethical Issue

Conflicts of interest