Cash and Internal Controls Chapter

1、8 Cash and Internal Controls ChapterCASH ANDINTERNAL CONTROLSChapter 8Conceptual Learning ObjectivesC1: Define internal control and identify its purpose and principles1.C2: Define cash and cash equivalents and explain how to report them.C3: Identify control features of banking activities.Procedural

2、Learning ObjectivesP1: Apply internal control to cash receipts and disbursements.P2: Explain and record petty cash fund transactions.P3: Prepare a bank reconciliation.PURPOSE OF INTERNAL CONTROLPolicies and procedures managers use to: Protect assets.Ensure reliable accounting.Promote efficient opera

3、tions.Urge adherence to company policies. C 1PURPOSE OF INTERNAL CONTROLThe Sarbanes-Oxley Act requires managers and auditors of public companies to document and certify the system of internal controls. Specific requirements related to auditors are: Auditors must evaluate internal controls and issue

4、 internal control reports. Auditors of a client are restricted as to what consulting services they can perform for that client. The person leading an audit can serve no more than seven years without a two-year break. Auditors work is overseen by the Public Company Accounting Oversight Board. Harsh p

5、enalties exist for violators sentences up to 25 years in prison with severe fines. C 1PRINCIPLES OF INTERNAL CONTROLInternal control principles common to all companies:Establish responsibilities.Maintain adequate records.Insure assets and bond key employees.Separate recordkeeping from custody of ass

6、ets.Divide responsibility for related transactions.Apply technological controls.Perform regular and independent reviews.C 1TECHNOLOGY AND INTERNAL CONTROLReducedProcessingErrorsMoreExtensive Testingof RecordsLimitedEvidence ofProcessingCrucialSeparation ofDutiesIncreased e-commerceC 1LIMITATIONS OF

7、INTERNAL CONTROLHuman ErrorNegligenceFatigueMisjudgmentConfusionHuman FraudIntent todefeat internalcontrols forpersonal gainC 1LIMITATIONS OF INTERNAL CONTROLThe costs of internal controls must not exceed their benefits.CostsBenefitsC 1CONTROL OF CASHAn effective system of internal control that prot

8、ects cash and cash equivalents should meet three basic guidelines:Handling cash is separated from recordkeeping for cash.Cash receipts are promptly deposited in a bank.Cash disbursements are made by check.C 2CASH, CASH EQUIVALENTS,AND LIQUIDITYCash Currency, coins and amounts on deposit in bank acco

9、unts, checking accounts, and some savings accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders.Cash EquivalentsShort-term, highly liquid investments that are:Readily convertible to a known cash amount.Close to maturity date and not sensitive to in

10、terest rate changes.C 2InventoryCashLiquidityHow easily an asset can be converted into cash to be used to pay for services or obligations.CASH, CASH EQUIVALENTS,AND LIQUIDITYC 2CASH MANAGEMENTThe goals of cash management are twofold:Plan cash receipts to meet cash payments when due.Keep a minimum le

11、vel of cash necessary to operate.Effective cash management involves applying the following cash management principles: Encourage collection of receivables. Delay payment of liabilities. Keep only necessary levels of assets. Plan expenditures. Invest excess cash.C 2CONTROL OF CASH RECEIPTS Over-the-C

12、ounter Cash ReceiptsCash register with locked-in record of transactions.Compare cash register record with cash reported. Cash Receipts by MailTwo people open the mail.Money to cashiers office.List to accounting dept.Copy of list filed.P 1CASH OVER AND SHORTSometimes errors in making change are disco

13、vered from differences between the cash in the cash register and the record of the amount of cash receipts. If a cash registers record shows $550 but the count of cash in the register is $555, we would prepare the following journal entry:P 1CONTROL OF CASH DISBURSEMENTSAll expenditures should be mad

14、e by check. The only exception is for small payments from petty cash.Separate authorization for check signing and recordkeeping duties.Use a voucher system.P 1VOUCHER SYSTEM OF CONTROL A voucher system establishes procedures for:Verifying, approving and recording obligations for eventual cash disbur

15、sements.Issuing checks for payment of verified, approved and recorded obligations.P 1CashierAccountingReceivingSupplier (Vendor)PurchasingRequestingCashierAccounting, Requesting & PurchasingAccountingSupplier (Vendor)Purchasing andAccountingSupplier, Requesting, Receiving & AccountingCheckIn

16、voice ApprovalReceiving ReportInvoicePurchase OrderPurchase RequisitionVoucherSenderReceiverVOUCHER SYSTEM OF CONTROLP 1PETTY CASH SYSTEM OF CONTROLSmall payments required in most companies for items such as postage, courier fees, repairs and supplies.P 2OPERATING A PETTY CASH FUNDPetty CashCompany

17、CashierPetty CashierAccountantP 2Petty CashPetty CashierOPERATING A PETTY CASH FUNDP 243?Stamps$43Courier$80Petty CashierA petty cash fund is used only for business expenses.OPERATING A PETTY CASH FUNDP 2OPERATING A PETTY CASH FUNDReceiptsPetty cash receipts with either no signature or a forged sign

18、ature usually indicate misuse of petty cash.Petty Cashier43?Stamps$43Courier$80P 2ReceiptsCompany Cashier$123To reimbursepetty cash fundUse a CashOver and Shortaccount if needed.AccountantPetty CashierP 2OPERATING A PETTY CASH FUNDPETTY CASH EXAMPLE Tension Co. maintains a petty cash fund of $400. T

19、he following summary information was taken from petty cash vouchers for July: Travel Expenses $79.30Customer Business Lunches 93.42Express Mail Postage 55.00Miscellaneous Office Supplies 32.48 Lets look at replenishing the fund if the balance on July 31 was $137.80. P 2 What amount of cash will be r

20、equired to replenish the petty cash fund?a.$260.20b.$262.20c.$139.80d.$137.80Lets prepare the journal entry to replenish the petty cash fund.PETTY CASH EXAMPLEP 2PETTY CASH EXAMPLEJournal entry to replenish petty cash fundP 2BANKING ACTIVITIES AS CONTROLSBank AccountsSignature CardsDeposit TicketsCh

21、ecksElectronic Funds TransferBank StatementsC 3BANK STATEMENT Usually once a month, the bank sends each depositor a bank statement showing the activity in the account.*Beginning-of-period balance.End-of-period balance.Checks and other debits.Deposits and other credits.C 3BANK RECONCILIATIONWhy are t

22、hebalances different?*A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on companys books.P 3RECONCILING ITEMSBank Statement BalanceAdd: Deposits in transit.Deduct: Outstanding ChecksAdd or Deduct: Bank errors.Bo

23、ok BalanceAdd: Collections made by the bank.Add: Interest earned on checking account.Deduct: Nonsufficient funds check (NSF).Deduct: Bank service charge.Add or Deduct: Book errors.P 3BANK RECONCILIATIONTwo sections:Reconcile bank statement balance to the adjusted bank balance.Reconcile book balance

24、to the adjusted book balance.The adjusted balances should be equal.P 3 Lets prepare a July 31 bank reconciliation statement for the Simmons Company. The July 31 bank statement indicated a balance of $9,610. The cash general ledger account on that date shows a balance of $7,430. Additional information necessary for the reconciliation is shown on the next screen. BANK RECONCILIATION EXAMPLEP 3Outstanding chec