PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 08
CASH AND INTERNAL CONTROLS
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INTERNAL CONTROL SYSTEM
Policies and procedures managers use to: Protect assets. Ensure reliable accounting. Promote efficient operations. Urge adherence to company policies.
C1
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SARBANES-OXLEY ACT (SOX)
The Sarbanes-Oxley Act requires managers and auditors of public companies to document and certify the system of internal
controls.
C1
Section 404 of SOX requires that managers document and assess the effectiveness of all internal control processes that
can impact financial reporting.
Sen. Paul Sarbanes(D-MD)
Rep. Mike Oxley(R-OH)
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PRINCIPLES OF INTERNAL CONTROL
Internal control principles common to all companies:1. Establish responsibilities.
2. Maintain adequate records.
3. Insure assets and bond key employees.
4. Separate recordkeeping from custody of assets.
5. Divide responsibility for related transactions.
6. Apply technological controls.
7. Perform regular and independent reviews.
C1
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TECHNOLOGY AND INTERNAL CONTROL
ReducedProcessing
Errors
MoreExtensive Testing
of Records
LimitedEvidence ofProcessing
CrucialSeparation of
Duties
Increased E-Commerce
C1
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LIMITATIONS OF INTERNAL CONTROL
Human Error
NegligenceFatigue
MisjudgmentConfusion
Human Fraud
Intent todefeat internal
controls forpersonal gain
C1
Human fraud triple-threat: Opportunity, Pressure, and Rationalization.
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LIMITATIONS OF INTERNAL CONTROL
The costs of internal controls must not exceed their benefits.
CostsBenefits
C1
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CONTROL OF CASHAn effective system of internal control that
protects cash and cash equivalents should meet three basic guidelines:
Handling cashis separated from recordkeeping for
cash.Cash
disbursements are made by
check.
C2
Cash receiptsare promptly
deposited in a bank.
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CASH, CASH EQUIVALENTS,AND LIQUIDITY
CashCurrency, coins and amounts on deposit in bank accounts,
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:
1. Readily convertible to a known cash amount.2. Close to maturity date and not sensitive to interest
rate changes.
C2
Cash and similar assets are called liquid assets because they can be readily used to settle such obligations.
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CASH MANAGEMENT
The goals of cash management are twofold:1. Plan cash receipts to meet cash payments when due.
2. Keep a minimum level of cash necessary to operate.
Effective cash management involves applyingthe following cash management principles: Encourage collection of receivables. Delay payment of liabilities. Keep only necessary levels of assets. Plan expenditures. Invest excess cash.
C2
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OVER-THE-COUNTER CASH RECEIPTS
P1
This graphic illustrates that none of the people involved can make a mistake or divert cash
without the difference being revealed.
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CASH OVER AND SHORTSometimes errors in making change are discovered from differences between the cash in the cash register and the
record of the amount of cash receipts.
P1
If a cash register’s record shows $550 but the count of cash in the register is $555, we would prepare the following journal
entry:
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CASH RECEIPTS BY MAILP1
Mailroom
Preferably, two people are
assigned the task of opening
the mail.
Cashier
The cashier deposits the money in a
bank.
Recordkeeper
The recordkeeper records the
amounts received in the
accounting records.
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CONTROL OF CASH DISBURSEMENTS
Keys to Controlling Cash Disbursements Require all expenditures to be made by check.Limit access to checks except for those who have
the authority to sign checks.
P1
Control of cash disbursements is especially important as most
large thefts occur from payment of fictitious invoices.
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VOUCHER SYSTEM OF CONTROL
A voucher system establishes procedures for:1. Verifying, approving, and recording
obligations for eventual cash disbursements.
2. Issuing checks for payment of verified, approved, and recorded obligations.
P1
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VOUCHER SYSTEM OF CONTROLP1
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PETTY CASH SYSTEM OF CONTROL
Small payments required in most companies for items such as postage, courier fees,
repairs, and supplies.
P2
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OPERATING A PETTY CASH FUND
Petty Cash
CompanyCompanyCashierCashier
P2
AccountantAccountant
Petty Petty CashierCashier
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Petty Cash
Petty Petty CashierCashier
OPERATING A PETTY CASH FUNDP2
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Delivery
Petty Petty CashierCashier
A petty cash fund is used only for
business expenses.
OPERATING A PETTY CASH FUNDP2
SuppliesServicesTransportation-in
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OPERATING A PETTY CASH FUND
Petty cash receipts with either no signature or a forged signature
usually indicate misuse of petty cash.
Petty Petty CashierCashier
P2
DeliverySuppliesServicesTransportation-in
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Company Company CashierCashier
$71.30
To reimbursepetty cash fund Petty Petty
CashierCashier
OPERATING A PETTY CASH FUNDP2
AccountantAccountant
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BASIC BANK SERVICES
Bank Accounts Signature Cards Deposit Tickets
Checks Electronic Funds Transfer
Bank Statements
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BANK STATEMENT
Usually once a month, the bank sends
each depositor a
bank statement
showing the activity in the
account.
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BANK RECONCILIATION
A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank
statement and the cash balance on company’s books.
P3
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BANK RECONCILIATIONP3
The balance of a checking account reported on the bank statement rarely equals the balance in
the depositor’s accounting records.
Cash Balance per Bank
+ Deposits in Transit
- Outstanding Checks
+/- Errors
Adjusted Cash Balance
Cash Balance per Book
+ Collections & Interest
- Uncollectible items
+/- Errors
Adjusted Cash Balance
Adjusting entries are recorded for the reconciling items on the book side of the reconciliation.
=
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ILLUSTRATION OF A BANK RECONCILIATION
P3
Cash Balance per Bank
+ Deposits in Transit
- Outstanding Checks
+/- Errors
Adjusted Cash Balance
We follow nine steps in preparing the bank reconciliation.
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ILLUSTRATION OF A BANK RECONCILIATION
P3
We follow nine steps in preparing the bank reconciliation.
Cash Balance per Book
+ Collections & Interest
- Uncollectible items
+/- Errors
Adjusted Cash Balance
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ILLUSTRATION OF A BANK RECONCILIATION
P3
We follow nine steps in preparing the bank reconciliation.
Adjusting entries are recorded for the reconciling items on the book side of the reconciliation.
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ILLUSTRATION OF A BANK RECONCILIATION
P3
Only the items reconciling the book balance require adjustment.
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GLOBAL VIEW
Control of CashAccounting definitions for cash are similar for U.S. GAAP and
IFRS.
Banking Activities as ControlsThere is a global demand for banking services, bank statements,
and bank reconciliations. To the extent feasible, companies utilize banking services as part of their effective control procedures.
Internal Control Purposes, Principles and ProceduresThe purposes and principles of internal control systems are
fundamentally the same across the globe.
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DAYS’ SALES UNCOLLECTED
Days’Sales
Uncollected
Accounts Receivable Net Sales × 365=
Indicates how much time is likely to pass beforewe receive cash receipts from credit sales.
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56 days $612,000,000$4,022,000,000 × 365=
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APPENDIX 8A: DOCUMENTATION AND
VERIFICATION
P4
Receiving Report
Purchase Requisition
Purchase Order
InvoiceVoucher
8 - 34APPENDIX 8B: CONTROL OF PURCHASE
DISCOUNTS
P5
The net method gives management an advantage in controlling and monitoring cash payments involving
purchase discounts.
When purchases are recorded at net amounts, a Discounts Lost expense account is recorded and
brought to management’s attention.
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END OF CHAPTER 08
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