Copyright © 2007 Prentice-Hall. All rights reserved 1 Internal Control & Cash Chapter 8

Copyright © 2007 Prentice-Hall. All rights reserved 1

Internal Control & CashInternal Control & CashInternal Control & CashInternal Control & Cash

Chapter 8


Objective 1Objective 1Objective 1Objective 1

Define internal control


Internal ControlInternal ControlInternal ControlInternal Control

All policies and procedures managers use to:

• Safeguard assets

• Encourage employees to follow company policies

• Promote operational efficiency

• Ensure accurate, reliable accounting records


Sarbanes-Oxley ActSarbanes-Oxley ActSarbanes-Oxley ActSarbanes-Oxley Act

• Public companies must issue internal control report

• Independent auditor must evaluate internal controls

• Created Public Company Accounting Oversight Board – oversees work of auditors of public companies


Sarbanes-Oxley ActSarbanes-Oxley ActSarbanes-Oxley ActSarbanes-Oxley Act

• Accounting firms may not both audit and provide certain consulting services for the same client

• Established penalties for violators



Describe good internal control procedures


Components of Internal ControlComponents of Internal ControlComponents of Internal ControlComponents of Internal Control

• Control environment – management sets the tone

• Assess risks

• Control procedures – designed to ensure that company’s goals are achieved

• Monitor controls – internal auditors

• Maintain appropriate information system


Principles of Internal ControlPrinciples of Internal ControlPrinciples of Internal ControlPrinciples of Internal Control

• Competent, reliable and ethical personnel– Hire– Train– Supervise

• Assignment of responsibilities – each employee has clearly defined responsibilities



• Separation of duties - limits fraud, promotes accurate financial statements– Separate operations from accounting– Separate custody of assets from accounting

• Audit – examination of company’s financial statements and accounting system– Internal auditors– External auditors



• Documents

• Electronic Devices

• Other


Internal Controls for E-CommerceInternal Controls for E-CommerceInternal Controls for E-CommerceInternal Controls for E-Commerce

Pitfalls

• Stolen credit card numbers

• Computer viruses and Trojans

• Phishing

Security Measures

• Encryption

• Firewalls


The Limitations of Internal The Limitations of Internal ControlControl

The Limitations of Internal The Limitations of Internal ControlControl

• Collusion - when two or more employees work together to defraud the company

• Solution – add more internal control

• Always consider cost/benefit of controls



Prepare a bank reconciliation and the related journal entries


Bank ReconciliationBank ReconciliationBank ReconciliationBank Reconciliation

• Explains all differences between general ledger cash account and bank statement cash balance– Deposits in transit– Outstanding checks– Bank or book errors– EFT’s– Service charges– NSF checks


Bank ReconciliationBank ReconciliationBank ReconciliationBank Reconciliation

Bank Statement

Add:

Deduct:

Adjusted bank balance

Book Balance

Add:

Deduct:

Adjusted book balance

Any increase (decrease) to cash that has been recorded in the books, but does not appear on the bank statement

Any increase (decrease) to cash that has been recorded by the bank, but has not been recorded in the books yet


Reconciling ItemsReconciling ItemsReconciling ItemsReconciling ItemsBank Statement

Add: Deposits in transit.Deduct: Outstanding checksAdd or Deduct: Bank errors

Book BalanceAdd: Interest revenueAdd: Bank collectionsDeduct: Nonsufficient funds check (NSF)Deduct: Service chargesAdd or Deduct: Book errors, EFT transfers


S8-6S8-6S8-6S8-6

Bank balance $3,800

Add: Deposits in transit 200

$4,000

Deduct: Outstanding checks 900

Reconciled bank balance $3,100

The company has recorded the cash receipts, but the bank does not show the deposit yet

The company has recorded the cash disbursements, but the checks have not yet cleared the bank


S8-6S8-6S8-6S8-6

Book balance $2,480

Add: Bank collection from customer 630

Interest revenue 10

Subtotal $3,120

Deduct: Bank service charge 20

Reconciled book balance $3,100

These items appear on the bank statement, but the company has not yet recorded them


S8-6S8-6S8-6S8-6

Bank balance $3,800Add: Deposits in transit 200

$4,000Deduct: Outstanding

checks 900

Reconciled bank balance $3,100

Book balance

$2,480Add: Collection

from customer

630 Interest revenue

10Subtotal

$3,120Deduct: Service charge

20Reconciled book balance

$3,100

Ranger Security SystemsBank Reconciliation

May 31, 2007


Adjusting the BooksAdjusting the BooksAdjusting the BooksAdjusting the Books

Book balance $2,480

Add: Bank collection from customer 630

Interest revenue 10

Subtotal $3,120

Deduct: Bank service charge 20

Reconciled book balance $3,100

Any reconciling item under “Book Balance” requires a journal entry to adjust the Cash account

Remember, you only need to prepare entries for any adjustment to the Book Balance


S8-7S8-7S8-7S8-7GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

May31 Cash 630Accounts Receivable-K. Brooks 630

Bank collection from customer

31 Cash 10

Interest Revenue 10

Interest earned on bank balance


S8-7S8-7S8-7S8-7GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

May31 Miscellaneous Expense 20

Cash 20Bank service charge



Apply internal controls to cash receipts


Cash Receipts Over the Cash Receipts Over the CounterCounter

Cash Receipts Over the Cash Receipts Over the CounterCounter

• 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


Cash Receipts by MailCash Receipts by MailCash Receipts by MailCash Receipts by Mail

• Incoming mail opened by a mailroom employee.• This person compares the check received with

the remittance advice• Receipts 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– Debit to Cash from accounting



Apply internal controls to cash payments


Controls Over Purchase and Controls Over Purchase and PaymentPayment

Controls Over Purchase and Controls Over Purchase and PaymentPayment

• Send purchase order to supplier – purchasing agent

• Receive inventory and invoice – receiving department

• Prepare receiving report – receiving department

• Make sure all documents agree – treasurer or controller

• Issue check – treasurer or controller


Voucher SystemVoucher SystemVoucher SystemVoucher System

• Voucher – document authorizing a cash payment

• Voucher register – similar to a purchases journal

• Check register – similar to cash payments journal


Petty CashPetty CashPetty CashPetty Cash

• Cash fund kept on hand to pay for small expenditures

• 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


Establish Petty SystemEstablish Petty SystemEstablish Petty SystemEstablish Petty System

General Journal

Page 8

Date Account Titles and Description PR Dr. Cr.

May 1 Petty Cash 200Cash 200

Petty Cash

We are using E8-22 to illustrate the petty cash system


Making PaymentsMaking PaymentsMaking PaymentsMaking Payments

Petty Cash Ticket No. 15

Date: _________________ Amount: ________________Paid to: _______________For: ___________________

Approved by: ____________Payment received by: _____________

Debit Account No.: _________

May 2, 2007 $8.00Foster’s Office Supply

Office Supplies

Sharon KahlCarol Miller

Supplies Expense – Account No. 615

A numbered ticket is prepared for each expenditure


Making PaymentsMaking PaymentsMaking PaymentsMaking Payments

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


Replenish Petty CashReplenish Petty CashReplenish Petty CashReplenish Petty Cash

• Using information on vouchers, record expenses in journal

• A new check is cashed for total amount of expenses

• Cash is placed in petty cash box


Replenish Petty Cash FundReplenish Petty Cash FundReplenish Petty Cash FundReplenish Petty Cash Fund

General Journal

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

May 31 Delivery Expense 22

Postage Expense 42

Supplies Expense 42

Miscellaneous Expense 16

Cash 122

Replenish petty cash fund


Cash Short and OverCash Short and OverCash Short and OverCash Short and Over

• Account used whenever a cash fund is short or over

• May have either a debit or credit balance

• Reported as miscellaneous expense or revenue depending on ending balance

• Closed at the end of the accounting period to income summary



Make ethical business judgments


Framework for Making Ethical Framework for Making Ethical DecisionsDecisions

Framework for Making Ethical Framework for Making Ethical DecisionsDecisions

• What is the ethical issue?

• What are the options?

• What are the possible consequences?

• What shall I do?


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