Ch07

Chapter 7-1

Chapter 7-2

Internal Control Internal Control

and Cashand Cash

Accounting, Third Edition

Chapter 7-3

1. 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.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 7-4

Fraud and Fraud and Internal Internal ControlControl

Fraud and Fraud and Internal Internal ControlControl

Cash ControlsCash ControlsCash ControlsCash Controls Use of a BankUse of a BankUse of a BankUse of a Bank Reporting CashReporting CashReporting CashReporting CashManaging and Managing and

Monitoring Monitoring CashCash

Managing and Managing and Monitoring Monitoring

CashCash

Fraud, Internal Control, and CashFraud, Internal Control, and CashFraud, Internal Control, and CashFraud, Internal Control, and Cash

Fraud Fraud

The The Sarbanes-Sarbanes-Oxley ActOxley Act

Internal Internal controlcontrol

Principles of Principles of internal internal control control activitiesactivities

LimitationsLimitations

Cash receipts Cash receipts controlscontrols

Cash Cash disbursements disbursements controlscontrols

Bank Bank statementsstatements

Reconciling Reconciling the bank the bank accountaccount

Cash Cash equivalentsequivalents

Restricted Restricted cashcash

Basic Basic principlesprinciples

Chapter 7-5

A dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.

Fraud and Internal ControlFraud and Internal ControlFraud and Internal ControlFraud and Internal Control

SO 1 Define fraud and internal control.SO 1 Define fraud and internal control.

FraudFraud

Three factors that contribute to fraudulent activity.

Illustration 7-1

Chapter 7-6

Companies must

develop principles of control over financial reporting.

continually verify that controls are working.

The Sarbanes-Oxley ActThe Sarbanes-Oxley Act

Independent auditors must attest to the level of internal control.

SOX created the Public Company Accounting Oversight Board (PCAOB).



Chapter 7-7

Methods and measures adopted to:

1. Safeguard assets.

2. Enhance accuracy and reliability of accounting records.

3. Increase efficiency of operations.

4. Ensure compliance with laws and regulations.



Internal ControlInternal Control

Chapter 7-8

Five Primary Components:

1. Control environment.

2. Risk assessment.

3. Control activities.

4. Information and communication.

5. Monitoring.



Internal ControlInternal Control

Chapter 7-9

Establishment of Responsibility

Control is most effective when only one person is responsible for a given task.

Segregation of Duties

Related duties should be assigned to different individuals.

Documentation Procedures

Companies should use prenumbered documents and all documents should be accounted for.

Principles of Internal Control Principles of Internal Control ActivitiesActivities


SO 2 Identify the principles of internal control activities.SO 2 Identify the principles of internal control activities.

Chapter 7-10

Physical Controls

Illustration 7-2




Chapter 7-11

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 7-12

Chapter 7-13

Limitations of Internal ControlLimitations of Internal Control

Costs should not exceed benefit.

Human element.

Size of the business.



Chapter 7-14

Chapter 7-15

Illustration 7-4

Cash ControlsCash ControlsCash ControlsCash Controls

Cash Receipts ControlsCash Receipts Controls

SO 3 Explain the applications of internal control principles to cash SO 3 Explain the applications of internal control principles to cash receipts.receipts.

Independent Internal

Verification

Supervisors count cash receipts daily; treasurer compares

total receipts to bank deposits daily


Only designated personnel are

authorized to handle cash receipts

(cashiers)


Different individuals receive cash, record cash receipts, and

hold the cash


Use remittance advice (mail

receipts), cash register tapes, and

deposit slips

Physical, Mechanical, and

Electronic Controls

Store cash in safes and bank vaults; limit access to

storage areas; use cash registers


Bond personnel who handle cash; require employees to take vacations; conduct background checks

Chapter 7-16

Over-the-Counter Over-the-Counter ReceiptsReceiptsOver-the-Counter Over-the-Counter ReceiptsReceipts


Illustration 7-5

Important internal control principle—

segregation of record-keeping from

physical custody.

Chapter 7-17

Mail ReceiptsMail ReceiptsMail ReceiptsMail 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

Permitting only designated personnel to handle cash receipts

is an application of the principle of:

a. segregation of duties.

b. establishment of responsibility.

c. independent check.

d. other controls.

Review QuestionReview Question



Chapter 7-19

Generally, internal control over cash disbursements is more effective when companies pay by check, rather than by cash.

Applications:

Voucher system

Petty cash fund


SO 4 Explain the applications of internal SO 4 Explain the applications of internal control principles to cash control principles to cash disbursements.disbursements.

Cash Disbursements ControlsCash Disbursements Controls

Chapter 7-20


Independent Internal

Verification

Compare checks to invoices; reconcile

bank statement monthly


Only designated personnel are

authorized to sign checks (treasurer)


Different individuals approve and make payments; check

signers do not record disbursements


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."

Physical, Mechanical, and

Electronic Controls

Store blank checks in safes, with limited access; print check

amounts by machine in indelible ink


Bond personnel who handle cash; require employees to take vacations; conduct background checks


Cash Disbursements Cash Disbursements ControlsControls

Illustration 7-6

Chapter 7-21

Chapter 7-22

The use of prenumbered checks in disbursing cash is an application of the principle of:

a. establishment of responsibility.

b. segregation of duties.

c. physical, mechanical, and electronic controls.

d. documentation procedures.




Chapter 7-23

Voucher System

Network of approvals, by authorized individuals, to ensure all disbursements by check are proper.

A voucher is an authorization form prepared for each expenditure.




Chapter 7-24

Petty Cash Fund - Used to pay small amounts.

Involves:

1. establishing the fund,

2. making payments from the fund, and

3. replenishing the fund.




Chapter 7-25

Contributes to good internal control over cash.

Minimizes the amount of currency on hand.

Creates a double record of bank transactions.

Bank reconciliation.

Control Features: Use of a BankControl Features: Use of a BankControl Features: Use of a BankControl Features: Use of a Bank

Chapter 7-26

Bank Statements

Debit Memorandum

Bank service charge

NSF (not sufficient funds)

Illustration 7-7

Credit Memorandum

Collect notes receivable.

Interest earned.


Chapter 7-27

The control features of a bank account do not include:

a. having bank auditors verify the correctness of the bank balance per books.

b. minimizing the amount of cash that must be kept on hand.

c. providing a double record of all bank transactions.

d. safeguarding cash by using a bank as a depository.



Chapter 7-28

Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances.

Reconciling Items:

1. Deposits in transit.

2. Outstanding checks.

3. Bank memoranda.

4. Errors.

Reconciling the Bank Account

SO 5 Prepare a bank reconciliation.SO 5 Prepare a bank reconciliation.


Time Lags

Chapter 7-29

Reconciliation Procedures


+ Deposit in Transit

- Outstanding Checks

+/- Bank Errors

+ Notes collected by bank

- NSF (bounced) checks

- Check printing or other service charges

+/- Book Errors

CORRECT BALANCE CORRECT BALANCE

Illustration 7-8


Chapter 7-30 SO 5 Prepare a bank reconciliation.SO 5 Prepare a bank reconciliation.


Chapter 7-31

Illustration: Illustration: Prepare a bank reconciliation at April 30.


Cash balance per bank statement $15,907.45

Add: Deposit in transit 2,201.40

Less: Outstanding checks (5,904.00)Adjusted cash balance per bank $12,204.85

Cash balance per books $11,589.45

Add: Collection of notes receivable 1,035.00

Error in check No. 443 36.00

Less: NSF check (425.60)

Bank service charge (30.00)

Adjusted cash balance per books $12,204.85


Chapter 7-32

Cash 615.40Apr. 30

Miscellaneous expense 45.00

Accounts receivable 425.60

Notes receivable

1,000.00Interest revenue

50.00


Illustration: Illustration: Journalize the adjusting entries at April 30 on the books of Laird Company.

Dr. Cr.

Accounts payable

36.00


Chapter 7-33

The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is:

a. outstanding checks.

b. deposit in transit.

c. a bank error.

d. bank service charges.




Chapter 7-34

Electronic Funds Transfers (EFT)

Disbursement systems that uses wire, telephone, or computers to transfer cash balances between locations.



Chapter 7-35

Chapter 7-36

Reporting CashReporting CashReporting CashReporting Cash

SO 6 Explain the reporting of cash.SO 6 Explain the reporting of cash.

Most liquid asset, listed first.

Cash equivalents

Illustration 7-11

Restricted cash

Chapter 7-37

Which of the following statements correctly describes the reporting of cash?

a. Cash cannot be combined with cash equivalents.

b. Restricted cash funds may be combined with Cash.

c. Cash is listed first in the current assets section.

d. Restricted cash funds cannot be reported as a current asset.


SO 6 Explain the reporting of cash.SO 6 Explain the reporting of cash.

Reporting CashReporting CashReporting CashReporting Cash

Chapter 7-38

1. Increase the speed of receivables collection.

2. Keep inventory levels low.

3. Delay payment of liabilities.

4. Plan the timing of major expenditures.

5. Invest idle cash.

Managing and Monitoring CashManaging and Monitoring CashManaging and Monitoring CashManaging and Monitoring Cash

Basic Principles of Cash ManagementBasic Principles of Cash Management

SO 7 Discuss the basic principles of cash management.SO 7 Discuss the basic principles of cash management.

Chapter 7-39

The Cash Budget

shows anticipated cash flows, usually over a one- to two-year period.

contributes to more effective cash management.

Keeping an Eye on CashKeeping an Eye on CashKeeping an Eye on CashKeeping an Eye on Cash

SO 8 Identify the primary elements of a cash budget.SO 8 Identify the primary elements of a cash budget.

Chapter 7-40

Petty Cash Fund - Used to pay small amounts.

Involves:

1. establishing the fund,

2. making payments from the fund, and

3. replenishing the fund.

Operation of the Petty Cash FundOperation of the Petty Cash FundOperation of the Petty Cash FundOperation of the Petty Cash Fund

SO 9 Explain the operation of a petty cash fund.SO 9 Explain the operation of a petty cash fund.

Appendix

Chapter 7-41

Illustration: If Laird Company decides to establish a $100 fund on March 1, the entry is:

Petty cash 100March 1

Cash100



Appendix

Chapter 7-42

Illustration: On March 15 the petty cash custodian requests a check for $87. The fund contains $13 cash and petty cash receipts for postage $44, supplies $38, and miscellaneous expenses $5. The entry is:

Postage inventory 44March 15

Cash87

Supplies 38

Miscellaneous expense 5



Appendix

Chapter 7-43

Illustration: Assume in the preceding example that the custodian had only $12 in cash in the fund plus the receipts as listed. The request for reimbursement would therefore be for $88. The entry is:

Postage inventory 44March 15

Cash over and short 1

Supplies 38

Miscellaneous expense 5

Cash88



Appendix

Chapter 7-44

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