Download Internal Control Over Cash Payments

Internal Control & Cash
Chapter 4
4-1
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Internal Control - Objectives
• Safeguard assets
• Encourage employees to follow company
policy
• Promote operational efficiency
• Ensure accurate, reliable accounting
records
• Comply with legal requirements
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Sarbanes-Oxley Act (SOX)
• Accounting scandals shook the public’s
confidence in the accounting profession
 Enron and WorldCom overstated profits
 Auditors Arthur Anderson went out of
business
• In response, Congress passed SOX
 Established new provisions for how large
corporations are audited
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Learning Objective 1
Set up an internal control system
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Control Environment
Tone set “at the top”
Top management should set good example
for employees
Risk assessment
Identify risks in the business environment
Control Procedures
Ensure goals are achieved
Monitoring of Controls
Auditors make sure controls are working
Information System
Provides accurate information to keep track of
assets and measure income
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Internal Control Procedures
• Competent, reliable and ethical employees
 Staff should be trained and fairly rewarded for
its work
• Assignment of Responsibilities
 Job descriptions should be clear
• Separation of Duties
 Operations from accounting
 Custody of assets from accounting
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Internal Control Procedures
• Audits
 Internal or External
• Documents
• Electronic Devices
• Other controls
 Fireproof vaults for important documents
 Bonds on employees who handle cash
 Mandatory vacations and job rotation
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Internal Controls for E-Commerce
• Risks of online business
 Stolen credit cards
 Computer viruses
 Phishing
• Security measures
 Encryption
 Firewalls
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Limitations of Internal Control
• Collusion
 Two people working together can circumvent
system
• Cost
 Company must weigh the benefits of controls
with the cost
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Bank Account as Control
• Keeping cash in a bank account
safeguards the asset
• Bank account documents provide controls

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

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Signature card
Deposit tickets
Checks
Bank Statements
Electronic Funds Transfer (EFT)
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Learning Objective 2
Prepare and use a bank reconciliation as a
control device
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Bank Reconciliation
• Process to update cash account
Book Balance
Bank Balance
Cash account in
General Ledger
Cash amount
according to
bank statement
Amounts don’t equal due to time lags in recording
transactions
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Preparing a Bank Reconciliation
Bank balance
Book balance
Add: Deposits in
transit
Add: Bank collections
& Interest revenue
Subtract:
Outstanding checks
Subtract: EFT
payments, service
charges, NSF checks
Add or Subtract: Bank
errors
Add or Subtract: Book
errors
Equals: Adjusted
Cash Balance
Equals: Adjusted
Cash Balance
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E4-20
Bank Balance, May 31
$595
Plus: deposit in transit
$1,788
Less: outstanding checks
($603)
Adjusted Cash Balance
$1,780
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E4-20
Book Balance, May 31
$1,882
Plus: Rent collection
Less: Service charge
Less: NSF checks
Less: Printed checks
Less: Error
Adjusted Cash Balance
$300
What would be
the amount of
the error?
($12)
($120)
($9)
Subtract the
actual amount of ____________
_
the deposit from
the amount
$1,780
recorded
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Entries from Reconciliation
• All items on the book side require a journal
entry
 All items added will result in a debit to cash
 All items subtracted will result in a credit to
cash
• After entries are posted
 Cash Balance in Ledger = Adjusted Cash
Balance on Reconciliation
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E4-21
JOURNAL
Date
Accounts
31-May Cash
Debit
$300
Rent revenue
Miscellaneous Expense
Cash ($9 +$12)
Credit
$300
$21
$21
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E4-21
JOURNAL
Date
What account is
debited for NSF
checks?
Accounts
31-May _____________________
Debit
$120
Cash
Salary Expense
Cash
Credit
$120
$261
$261
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Learning Objective 3
Apply internal controls to cash receipts and
cash payments
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Internal Control over Cash Receipts
Over the counter
By mail
• Cash register record
transactions
• Receipts issued to
customer
• Manager compares cash
in drawer to cash register
record
• Receipts deposited at
least daily
• Checks and remittance
advice separated
• Checks sent to treasurer
for deposit
• Remittance advice sent to
accounting to record
• Bank deposit slip
compared with debit to
cash
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Internal Control Over Cash
Payments
• Payment by check
 Provides record of payment
 Must be signed by authorized official
 Official should study evidence supporting
payment
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Documents Used to Control
Purchases
• Purchase order
 Prepared by purchasing company to place
order
• Invoice
 Prepared by selling company to list items sent
and to request payment
• Receiving report
 Prepared by purchasing company to show
that goods were received
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Payment packet
Receiving Report
Invoice
Documents
should agree
before
payment is
made
Purchase Order
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Separation of Duties
• Responsibilities should be split:
 Purchasing goods
 Receiving goods
 Approving and paying for goods
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Petty Cash
• Small amount of cash kept on hand for
incidental purchases
• Fund is established at a set amount
• Custodian of fund prepares ticket that lists
each item purchased
• Tickets plus remaining cash should equal
fund balance
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Learning Objective 4
Use a budget to manage your cash
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Budget
• Financial plan that
helps coordinate
business activities
• A cash budget helps
a company manage
cash by planning
receipts and
payments
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CASH BUDGET
Beginning cash balance
Plus: Budgeted Cash Receipts
Minus: Budgeted Cash payments
Equals: Expected ending cash balance
Compare ending
balance to
minimum needed
If excess,
invest
If shortfall,
borrow
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E4-24
Cash Budget 20X8
Beginning cash balance
$81
Budgeted cash receipts:
Cash collections from
customers
$11,284
Sale of equipment
115 $11,399
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E4-24
Budgeted cash payments:
Costs of services and
products
$6,166
Operating expenses
2,543
Purchase of new equipment
1,825
Debt payments
597
Dividend payment
338
Expected cash balance
$11,469
$11
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E4-24
Expected
Cash Balance
= $11
Company’s
Minimum
Cash Balance
= $75
What amount of
borrowing would get
the company to its
minimum?
Expected
Borrowing =
________
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Learning Objective 5
Make ethical business judgments
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Codes of Ethics
• Most companies have a code of ethics
• Owners and managers must set an ethical
tone as well
• The accounting profession is expected to
maintain higher standards
 AICPA Code of Professional Conduct
 Standards of Ethical Conduct for
Management Accountants
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Ethical Issues in Accounting
• Pressure often exists for managers to
reach earnings or stock price goals
• Earnings can be manipulated by
 Understating expenses
 Overstating revenues
• Use Framework for Making Ethical
Judgments
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Framework for Ethical Judgments
• Identify the ethical
issue
• Specify the
alternatives
• Assess the possible
outcomes
• Make the decision
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End of Chapter Four
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