INTERNAL CONTROL AND CASH

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CHAPTER 8

• INTERNAL CONTROLAND CASH

Accounting Principles, Eighth Edition
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Internal Control and Cash
Internal Control
Cash Controls
Use of a Bank
Reporting Cash

• The Sarbanes-Oxley Act
• Principles
• Limitations

• Cash equivalents
• Restricted cash
• Compensating balances

• Making deposits
• Writing checks
• Bank statements
• Reconciling the bank account

• Control over cash receipts
• Control over cash disbursements

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Internal Control

• Methods and measures adopted to
• Safeguard assets.
• Enhance accuracy and reliability of accounting
  records. Reduce risk of
• Errors (unintentional)
• Irregularities (intentional)

Under the Sarbanes-Oxley Act, all publicly traded
U.S. corporations are required to maintain an
adequate system of internal control.
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Internal Control
The Sarbanes-Oxley Act

• Companies must
• develop principles of control over financial
  reporting.
• continually verify that controls are working.

Independent auditors must attest to the level of
internal control. SOX created the Public Company
Accounting Oversight Board (PCAOB).
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Internal Control
Principles of Internal Control
Illustration 8-1

• Measures vary with
• size and nature of the business.
• managements control philosophy.

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Internal Control
Principles of Internal Control
ESTABLISHMENT OF RESPONSIBILITY Control is most
effective when only one person is responsible for
a given task.
SEGREGATION OF DUTIES
DOCUMENTATION PROCEDURES Companies should use
prenumbered documents and all documents should be
accounted for.
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Internal Control
Principles of Internal Control
PHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS
Physical
Mechanical and Electronic
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Internal Control
Principles of Internal Control

• INDEPENDENT INTERNAL VERIFICATION
• Records periodically verified by an employee who
  is independent.
• Discrepancies reported to management.

• OTHER CONTROLS
• Bond employees.
• Rotate employees duties and require vacations.
• Conduct background checks.

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Internal Control
Limitations of Internal Control

• Costs should not exceed benefit.
• Human element.
• Fatigue, carelessness
• Failure to follow IC procedures
• Size of the business.
• Management Overide

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Cash Controls

• Cash consists of coins, currency, checks, money
  orders, and money on hand or on deposit in a
  bank.
• Cash receipts come from
• cash sales
• collections on account from customers
• receipt of interest, rent, and dividends
• investments by owners
• bank loans
• proceeds from the sale of noncurrent assets

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Over-the-Counter Receipts
Cashiers Department
Sales Department
Illustration 8-7
Prepare daily summary
Prepare deposit slip

• Cashier ring up sales
• Supervisor
• reads register totals
• makes cash counts
• prepares cash count sheets

Bank (deposit)
Treasurer (verification)
Accounting (record)
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Mail Receipts

• Control Procedures
• Mail receipts should be opened by two people, a
  list prepared, and each check endorsed.
• Copy of the list, along with the checks and
  remittance advices, sent to cashiers department.
  
• Cashier adds the checks to the over-the-counter
  receipts and prepares a daily cash summary and
  makes the daily bank deposit.
• Copy of list sent to treasurers office for
  comparison with total shown on daily cash summary.

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Cash Controls
Internal Control over Cash Disbursements

• Generally, internal control over cash
  disbursements is more effective when companies
  pay by check, rather than by cash.
• Applications
• Voucher system
• Electronic funds transfers (EFT) system
• Petty cash fund

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Cash Controls
Internal Control over Cash Disbursements

• 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.

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Cash Controls
Internal Control over Cash Disbursements

• Electronic Funds Transfers (EFT)
• Disbursement systems that uses wire, telephone,
  or computers to transfer cash balances between
  locations.

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Cash Controls
Internal Control over Cash Disbursements

• Petty Cash Fund - Used to pay small amounts.
• Involves
• establishing the fund,
• making payments from the fund, and
• replenishing the fund.

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Cash Controls
E8-8 Lincolnville Company uses an imprest petty
cash system. The fund was established on March 1
with a balance of 100. During March the
following petty cash receipts were found in the
petty cash box. The fund was replenished on
March 15 when the fund contained 3 in cash. On
March 20, the amount in the fund was increased to
150. Instructions Journalize the entries in
March that pertain to the operation of the petty
cash fund.
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Cash Controls
E8-8 The fund was established on March 1 with a
balance of 100
Petty cash 100
March 1
Cash 100
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Cash Controls
E8-8 The fund was replenished on March 15 when
the fund contained 3 in cash.
Postage expense 39
March 15
Freight-out 21
Miscellaneous expense 11
Travel expense 24
Cash over Short 2
Cash 97
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Cash Controls
E8-8 On March 20, the amount in the fund was
increased to 150.
Petty cash 50
March 20
Cash 50
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Use of a Bank

• Contributes to good internal control over cash.
• Minimizes the amount of currency on hand.
• Creates a double record of bank transactions.
• Bank reconciliation.

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Use of a Bank
Illustration 8-10
Making Bank Deposits Authorized employee should
make deposit.
Bank Code Numbers
Reverse Side
Front Side
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Use of a Bank
Writing Checks Written order signed by depositor
directing bank to pay a specified sum of money to
a designated recipient.
Illustration 8-11
Maker
Payee
Payer
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Use of a Bank
Illustration 8-12

• Bank Statements
• Debit Memorandum
• Bank service charge
• NSF (not sufficient funds)

• Credit Memorandum
• Collect notes receivable.
• Interest earned.

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Use of a Bank
Reconciling the Bank Account

• Reconcile balance per books and balance per bank
  to their adjusted (corrected) cash balances.
• Reconciling Items
• Deposits in transit.
• Outstanding checks.
• Errors.
• Bank memoranda.

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Use of a Bank
Reconciliation Procedures
Illustration 8-13
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
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Use of a Bank Reconciliation

• The following information pertains to Laird
  Company.
• Cash balance per bank, April 30, 15,907.45.
• Cash balance per books, April 30, 11,589.45.
• July bank service charge not recorded by the
  Laird 30.
• Deposits in transit, April 30, 2,201.40
• Bank collected 1,000 note for Laird in April ,
  plus interest 50, less fee 15.
• Laird wrote check 443 for 1,226.00 and was
  correctly paid by bank. However, Laird recorded
  check as 1,262.00.
• NSF check from J.R. Baron, 425.60
• Outstanding checks, April 30
• 453 for 3,000.00
• 457 for 1,401.30
• 460 for 1,502.70

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BANK RECONCILIATION

• Adjusted cash balance per bank
  12,204.85
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  

Adjusted cash balance per bank
12,204.85
















































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ENTRIES FROM BANK RECONCILIATION
Collection of Note Receivable This entry
involves four accounts. Interest of 50 has not
been accrued and the collection fee is charged to
Miscellaneous Expense.
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ENTRIES FROM BANK RECONCILIATION
Book Error An examination of the cash
disbursements journal shows that check No. 443
was a payment on account to Andrea Company, a
supplier. The check, with a correct amount of
1,226.00, was recorded at 1,262.00.
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ENTRIES FROM BANK RECONCILIATION
NSF Check An NSF check becomes an accounts
receivable to the depositor.
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ENTRIES FROM BANK RECONCILIATION
Bank Service Charges Check printing charges (DM)
and other bank service charges (SC) are debited
to Miscellaneous Expense because they are usually
nominal in amount.
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Reporting Cash
Most liquid asset, listed first in current assets
section of balance sheet.
Illustration 8-16

• Cash equivalents
• Restricted cash
• Compensating balances