Internal Control and CASHBY JUDITH PAQUETTE

Learning Objectives

Learn the elements of Internal Control

Discuss the role of Internal Control in a business to prevent fraud

Discuss Cash and Accounting for Cash

Know Internal Controls for Cash

Know the activities of Cash Management

Understand Financial Audits and Operational Audits

What is Fraud?

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

Why does Fraud Happen?

Pressure

I have debts and they are coming due I owe money My friends invited me to Vegas, I really want to

go My car payments are high My husband had surgery and we need the $ to

pay the medical bills.

Rationalization

I earn a low wage. I got passed over for promotion They make so much, they don’t need the

money I’m only borrowing the $$...I’ll pay it back Everyone’s doing it, even the supervisor!

Coming in late, but having someone else sign in Taking supplies from the company

Opportunity…

Company must try to reduce/eliminate opportunities. That is their job!

This requires many elements of Internal Control

The Sarbanes-Oxley Act, 2002 Companies must

develop principles of control over financial reporting.

continually verify that controls are working.

Independent auditors must attest to the adequacy

of internal control.

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

GOALs of Internal Control

SAFEGUARD a Company’s AssetsAssure Financial Statement are RELIABLEAssure EFFICIENCY of the Company’s

operationsBe in COMPLIANCE with Government

Laws/Regulations

TYPES of Internal Control

PREVENTION – deter a problem before IT HAPPENS

DETECTION – discover a problem as soon as possible after it HAPPENS.

Elements of GOOD Internal Control1. Establishment of responsibility

2. Segregation of duties

3. Hire Competent personnel

4. Documentation procedures (control numbers on all transactions)

5. Develop plans/budgets

6. Maintain adequate records (accounting)

7. Physical/electronic controls

8. Independent internal verification/Audits

Establishment of responsibility

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

EXAMPLES:

Cash RegisterPasswords to track transactions

Segregation of duties

SEGREGATON OF DUTIES

#a Related duties, including physical custody and record keeping, should be assigned to different individuals.

#b Record-Keeping of assets s/b separated from Physical Custody of assets

Hire Competent personnel

HUMAN RESOURCE CONTROLS

1. Bond employees.

2. Rotate employees’ duties and require vacations.

3. Conduct background checks.

Documentation procedures (control numbers on all transactions)

DOCUMENTATION

Companies should use prenumbered documents and account for all documents.

Be able to trace each document back to transaction/person.

Don’t have unnumbered checks, invoices, blank forms!

Require approval signatures

Account for missing checks!

Develop plans/budgets

Maintain adequate records (accounting)

Inspect/inventory Plant Assets

Reconcile “books” to reality Take Physical Inventory and Adjust the books to match the physical

inventory

Accounts Receivable confirmation

Accounts Payable confirmation

Physical/electronic controls

Safes/vaults

Warehouses

Computers with passcodes

TV monitors

Time clocks

Alarms

Key cards/ID

Independent internal verification/Audits

1. Decides whether ADEQUATE Internal Controls are in place.

2. Decides whether Internal Controls are actually WORKING.

3. REPORT:

Any “audit points” (areas for improvement)

Accounting for CASH

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

Independent Internal VerificationSupervisors count cash receipts daily; treasurer compares total receipts to bank deposits daily

Establishment of ResponsibilityOnly designated personnel are authorized to handle cash receipts (cashiers)

Segregation of DutiesDifferent individuals receive cash, record cash receipts, and hold the cash

Documentation ProceduresUse remittance advice (mail receipts), cash register tapes, and deposit slips

Physical ControlsStore cash in safes and bank vaults; limit access to storage areas; use cash registers

Human Resource ControlsBond personnel who handle cash; require employees to take vacations; deposit all cash in bank daily

Illustration 7-4

Cash Receipts ControlsCash Receipts Controls

Over-the-Counter Receipts

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 cashier’s 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 treasurer’s office for comparison with total shown on daily cash summary.

Cash Receipts ControlsCash Receipts Controls

Mail Receipts – Cash received on Account

Petty Cash

Petty Cash Fund - Used to pay small amounts.

Involves:

1. establishing the fund,

2. making payments from the fund, and

3. replenishing the fund.

USING A BANK STAT

Using A Bank is a Good Internal Control

It keeps cash on hand low

It creates a double record of transactions

It includes a BANK STATEMENT

Note: Ending Balance of $6,488.95

The Bank Statement

Rarely equals what the Company’s “books” have in the Cash Account ending Balance

WHY?Timing Issues…

PLUS Deposits recorded by the BANK but not yet by The Company. (And corrections)

Balance per BOOKS

PLUS: Deposits notYet recorded by the Bank (and corrections)

Balance per BANK

LESS: Check not yet received by the BANK (and corrections)

= Adjusted Balance per BANK

= Adjusted Balance per BOOKS

LESS: Disbursements recorded by the BANK but not yet by The Company. (And Corrections).

BANK RECONCILIATION – BANK STATEMENT TO COMPANY’S “BOOKS”

=

Deposits in Transit - Checks (Checks (from customers) ADDED to the Company’s books but not yet recorded by the Bank.

Assume three checks were added to the Company’s Cash balance, but do not yet appear on the Bank Statement, $225.

Action: Add to Bank Balance.

Outstanding Checks – Checks deducted from the Company’s books, but not yet cashed

Note the gap between Check # 166 and Check # 169

Checks 167 and 168 have NOT been Cashed; they are Outstanding.

Additional information: Checks # 172 and #173 (disbursements) were recorded by the books, but NOT by the Bank

CHECK AMOUNT167 $ 301.66 168 $ 149.50 172 $ 450.00 173 $ 240.50

$ 1,141.66

Action: Deduct from Bank Balance.

Other Charges – review the Bank Statement for additional charges and credits

A check “bounced” (e.g., it was returned because the customer did not have enough money) $35.40 . Also called NSF (Not Sufficient Funds)

The BANK charge a $10 monthly service fee for (welcome to the world of FEEs…)

Action: Deduct from BOOK Balance.

Collection of a NOTE – The BANK collected a note and deposited it to the Company’s bank account, but it was not yet recorded by the Company)

The Note Receivable was paid in full with Principal of $300.

The Bank charged a $5 collection fee. (more fees…)

The BANK Reconciliation

  WILSON CORPORATION     Balance Per Bank $ 6,488.95 Balance per books $ 5,322.69    PLUS: PLUS:  Deposits in Transit $ 225.00 Collection of Note $ 300.00    LESS: LESS:  Outstanding Checks Collection Fee $ 5.00

167 $ 301.66 NSF Check $ 35.40 168 $ 149.50 Service Fee $ 10.00 172 $ 450.00  173 $ 240.50  

  $ 1,141.66 $ 50.40       

Adjusted Balance per Bank $ 5,572.29 Adjusted Balance per Books $ 5,572.29

         

FINAL Step – Making the Journal Entries for the Bank Reconciliation

You must create Journal Entries for ALL the items on the right side of the Bank Reconciliation, to get the Book Balance corrected:

1) To record a note collected, less a collection fee

2) To reclassify an NSF check back into Accounts Receivable (because it was NOT collected)

3) To book the Bank Service Charge

To record a note collected, less a collection fee

11/30/2013 CASH 295 Miscell. Expense 5

Notes Receivable 300 To record a note collected by the bank, less a collection fee.

To reclassify an NSF check back into Accounts Receivable (because it was NOT collected)

11/30/2013 Accounts Receivable 35 Cash 35

To reclassify an NSF check

To book the Bank Service Charge

11/30/2013 Misc. Expense 10 Cash 10

To record Bank Service Charge

Effective Cash Management

Monitoring Cash

Primary Activities of Cash Management

Effective Cash Management

Manage Accounts Receivable!Manage Inventory LevelsManage Accounts Payable INVEST EXCESS CASH!

The End

GOOD BY AND GOOD LUCK!