chapter 7. define internal control organizational plan and all the related measures to: 3 copyright...

Chapter 7

Define internal control

Organizational plan and all the related measures to:

3Copyright (c) 2009 Prentice Hall. All rights reserved.

Explain the Sarbanes-Oxley Act

Congress passed SOX after the Enron and WorldCom scandals

Provisions include:◦ Public companies must issue an internal control

report◦ Created Public Company Accounting Oversight

Board Oversees work of auditors of public companies

◦ Accounting firms may not both audit and provide consulting services to the same company

◦ Stiff penalties for violators 20 – 25 years in prison


List and describe the components of internal control and control procedures

Monitoring of controls Information System Control procedures Control Environment Risk Assessment


MICER

Acronym to remember five components

Competent, reliable and ethical personnel◦ Trained and supervised

Assignment of responsibilities ◦ Each employee has clearly defined responsibilities

Separation of duties◦ Operations separate from accounting◦ Custody of assets separate from accounting

Audits◦ Accounting records should be examined regularly

Documents◦ Invoices should be pre-numbered


Electronic Devices◦ Inventory sensors

Other controls◦ Alarms and security cameras◦ Loss-prevention specialists◦ Bonding employees◦ Mandatory vacations

Copyright (c) 2009 Prentice Hall. All rights reserved. 9

Explain control procedures unique to e-commerce

Risks◦ Stolen credit card numbers and passwords◦ Computer viruses and Trojans◦ Phishing

Security measures◦ Encryption◦ Firewalls


Collusion: ◦ Two or more employees work together to defraud

the company Cost:

◦ The stricter the internal control, the greater the cost


Apply internal controls to cash receipts

Receipt is issued for each transaction Cash drawer opens when a transaction is

entered At the end of a shift, manager proves cash

by comparing cash in drawer with machine’s record of sales

At least once a day, cashier deposits cash in bank

Register tape sent to accounting department


Beginning BalanceAdd: DepositsLess: Withdrawals-----------------------------------

Ending Balance Question: Does the Ending Balance equal

what we count out the balance to be?◦ In case of the bank statement, we must first

adjust the bank statement to reflect Deposits in transit Outstanding Checks (ones that haven’t been cashed)


Key: Separate accounting records (posting the credit to Accounts Receivable and other accounts from posting the debit to cash)

Incoming mail opened by a mailroom employee

Customer checks sent to treasurer and cashier deposits money in bank

Remittance advice sent to accounting for journal entries

Controller compares records of◦ The day’s bank deposit amount from treasurer◦ The debit to Cash made by the accounting

department (which will have to tie to the credit to Accounts Receivable)


Apply internal controls to cash payments

Important internal control Check provides record of payment Must be signed by an authorized official

who reviews documents supporting the payment◦ This separates the actual writing of the check

from the accounting records of it


The documents that record the transaction are SEPARATED from the goods involved in the transaction

Employees must collude to defraud the company


Describe ethical business issues related to accounting

Analyzing right from wrong Most companies have a code of ethics Accountants held to higher standard Ethical decision making

◦ Define the situation◦ Specify alternatives◦ Identify consequences◦ Make the decision


Do you think that Enron executives felt they had “crossed the line” or did they look down one day to discover they had finally stepped over it.

Favorite movie to watch for “ethics” is the Rainmaker◦ Ethics of purpose, ethics of procedure◦ Ethics of purpose, no ethics of procedure (the end,

justifies the means)◦ No ethics of purpose, ethics of procedure (harming

people but doing it within the law)◦ No ethics of purpose and no ethics of procedure

As accountants, we are asked often to “lie with numbers”


Demonstrate the use of a bank account as a control device

Prepare a bank reconciliation and the related journal entries

Cash account in general ledger

Bank statement


Timing differences due to time lag in recording transactions

Usually show different balances

A bank reconciliation is prepared to explain these differences

A bank reconciliation is prepared to explain these differences

We have to FIRST figure out the correct balance for cash in the bank account◦ It is NOT the bank’s balance

Does not show deposits in transit Does not show outstanding checks

◦ It is NOT the general ledger balance Does not show unrecorded deposits Does not show unrecorded withdrawals

Service charges

Reconciling petty cash fund is easier ◦ we can count the balance in the drawer and

reconcile to it


See separate handouts


Explain and journalize petty cash transactions

Cash fund kept on hand to pay for small expenditures

Controls needed: (Separate custody of asset from accounting)◦ Designate a custodian of petty cash fund◦ Keep a specific amount of cash on hand◦ All fund payments are supported with a petty cash

ticket which shows the amount taken out of the drawer, who took it, and reason for the withdrawal (so we know what account

needs to be debited)]


At ANY time, we can count the cash and the petty cash tickets and these should total up to the amount established for the petty cash fund

Key: It works like an inventory account Beginning Balance

Add: Deposits (There are NONE)Less: Withdrawals-----------------------------------

Ending Balance (if this doesn’t count to the amount in the petty cash drawer, we have “shrinkage” which we call “cash

over & short”


Check written for designated amount and cashed

Journal entry:


General Journal

Page 8

Date Account Titles and Description PR Dr. Cr.

May 1 Petty cash $$$

Cash $$$

34

Petty Cash Ticket No. 15

Date: _________________ Amount: ________________Paid to: _______________For: ___________________

Debit Account No.: _________

May 2, 2009 $8.00Foster’s Office Supply

Office Supplies

Sharon KahlCarol Miller

Supplies Expense – Account No. 615

A numbered ticket is prepared for each expenditure

Copyright (c) 2009 Prentice Hall. All rights reserved.

Approved by: ___________ Payment received by: ___________

35

Petty Cash Ticket No. 15

Date: _________________ Amount: ________________Paid to: _______________For: ___________________

Approved by: ____________ Payment received by: _____________

Debit Account No.: _________

May 2, 2007 $8.00

Foster’s Office SupplyOffice Supplies

Sharon KahlCarol Miller

615

Petty Cash


Maintaining petty cash at its designated balance

Money in petty cash plus the receipts should always equal designated balance


Petty cash

balance

Petty cash

balance

Total amounts on petty cash tickets Add to cash remaining in fund

◦ Should equal petty cash fund balance◦ If it doesn’t, missing amount is Cash short and

over Journal entry prepared to record

expenditures A new check is cashed to replenish fund to

its original balance Cash is placed in petty cash box


Account used whenever a cash fund is short or over

May have either a debit or credit balance Reported as expense or revenue depending

on ending balance


39

General Journal

Page 8 Date Account Titles and Description PR Dr. Cr.

Aug 31 Office supplies 60

Delivery expense 30

Cash short & over 8

Cash 82

Replenish petty cash fund


The check we write for $82 is written for “cash” which we cash at the bank and then put the $82 cash in the petty cash drawer.

The check will carry a “memo” line “to replenish petty cash”



The imprest system requires that the petty cash box contains cash and receipts that total the amount of the imprest balance. This clearly identifies the amount of cash for which the custodian is responsible, and that is the system’s main internal control feature.

#1#1

General JournalDate Account Titles and Description PR Dr. Cr.

Petty cashDec 1

$150

Cash $150

#2#2


General JournalDate Account Titles and Description PR Dr. Cr.

Dec 31

Office supplies 111

Delivery expense 30

Cash 136

Cash short & over 5

chapter 7. define internal control organizational plan and all the related measures to: 3 copyright...

Documents

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components of internal

internal controls

separate accounting

cashier deposits cash

balance question