Internal Control Cash Chapter 7 Learning Objective 1

Internal Control & Cash Chapter 7

Learning Objective 1 Define internal control

Internal Control Organizational plan and all the related measures to: Safeguard assets Encourage employees to follow company policies Ensure accurate, reliable accounting records Promote operational efficiency Copyright (c) 2009 Prentice Hall. All rights reserved. 3

Learning Objective 2 Explain the Sarbanes-Oxley Act

Sarbanes-Oxley Act (SOX) Congress passed SOX after the Enron and World. Com scandals Provisions include: ◦ Public companies must issue an internal control report ◦ Created Public Company Accounting Oversight Board Oversees work of auditors of public companies ◦ Accounting firms may not both audit and provide consulting services to the same company ◦ Stiff penalties for violators 20 – 25 years in prison Copyright (c) 2009 Prentice Hall. All rights reserved. 5

Learning Objective 3 List and describe the components of internal control and control procedures

Components of Internal Control Monitoring of controls Information System Control procedures Control Environment Risk Assessment MICER Acronym to remember five components Copyright (c) 2009 Prentice Hall. All rights reserved. 7

Internal Control Procedures Competent, reliable and ethical personnel ◦ Trained and supervised Assignment of responsibilities ◦ Each employee has clearly defined responsibilities Separation of duties ◦ Operations separate from accounting ◦ Custody of assets separate from accounting Audits ◦ Accounting records should be examined regularly Documents ◦ Invoices should be pre-numbered Copyright (c) 2009 Prentice Hall. All rights reserved. 8

Internal Control Procedures Electronic Devices ◦ Inventory sensors Other controls ◦ ◦ Alarms and security cameras Loss-prevention specialists Bonding employees Mandatory vacations Copyright (c) 2009 Prentice Hall. All rights reserved. 9

Learning Objective 4 Explain control procedures unique to e-commerce

Internal Controls for E-Commerce Risks ◦ Stolen credit card numbers and passwords ◦ Computer viruses and Trojans ◦ Phishing Security measures ◦ Encryption ◦ Firewalls Copyright (c) 2009 Prentice Hall. All rights reserved. 11

The Limitations of Internal Control Collusion: ◦ Two or more employees work together to defraud the company Cost: ◦ The stricter the internal control, the greater the cost Copyright (c) 2009 Prentice Hall. All rights reserved. 12

Learning Objective 5 Demonstrate the use of a bank account as a control device

Control Documents of a Bank Account Signature card Deposit ticket Bank statement Check Bank

Learning Objective 6 Prepare a bank reconciliation and the related journal entries

Two Records of Business’s Cash account in general ledger Bank statement Usually show different balances Timing differences due to time lag in recording transactions A bank reconciliation is prepared to explain these differences Copyright (c) 2009 Prentice Hall. All rights reserved. 16

Bank Reconciliation Bank Book Add: Deduct: Adjusted bank balance Adjusted book balance These amounts

Reconciling Items Bank Statement Balance Add: Deposits in transit. Deduct: Outstanding checks Add or Deduct: Bank errors Book Balance in ledger Add: Bank collections Add or Deduct : EFT transfers Deduct: Service charges Add: Interest revenue Deduct: Nonsufficient funds check from customer(NSF) and cost of printed checks Add or Deduct: Book errors Copyright (c) 2009 Prentice Hall. All rights reserved. 18

Journalizing Transactions from the Reconciliation Book balance $, $$$ Add: Bank collection from customer $$$ Interest revenue $$$ Subtotal $, $$$ Deduct: Bank service charge $$ NSF check $$$ Reconciled book balance $, $$$ Any item under “Book Balance” requires a journal entry to adjust the Cash account Copyright (c) 2009 Prentice Hall. All rights reserved. 19

Journalizing Transactions from the Reconciliation GENERAL JOURNAL DATE DESCRIPTION REF May 31 Cash Accounts receivable DEBIT CREDIT $$$ Bank collection from customer Cash Interest revenue $$ $$ Interest earned on bank balance Copyright (c) 2009 Prentice Hall. All rights reserved. 20

Journalizing Transactions from the Reconciliation GENERAL JOURNAL DATE DESCRIPTION REF Miscellaneous expense Cash DEBIT CREDIT $$ $$ Bank service charge Accounts receivable Cash $$$ NSF check Copyright (c) 2009 Prentice Hall. All rights reserved.

Exercise 7 -18 Copyright (c) 2009 Prentice Hall. All rights reserved. 22

Learning Objective 7 Apply internal controls to cash receipts

Cash Receipts Over the Counter Receipt is issued for each transaction Cash drawer opens when a transaction is entered At the end of a shift, manager proves cash by comparing cash in drawer with machine’s record of sales At least once a day, cashier deposits cash in bank Register tape sent to accounting department Copyright (c) 2009 Prentice Hall. All rights reserved. 24

Cash Receipts by Mail Incoming mail opened by a mailroom employee Customer checks sent to treasurer and cashier deposits money in bank Remittance advice sent to accounting for journal entries Controller compares records of ◦ The day’s bank deposit amount from treasurer ◦ The debit to Cash made by the accounting department Copyright (c) 2009 Prentice Hall. All rights reserved. 25

Learning Objective 8 Apply internal controls to cash payments

Payment by Check Important internal control Check provides record of payment Must be signed by an authorized official who reviews documents supporting the payment Copyright (c) 2009 Prentice Hall. All rights reserved. 27

Controls over Purchases and Payments Document Action Purchase order Company requests goods from supplier Invoice Supplier sends goods Receiving report Company receives goods Check Company pays for goods Copyright (c) 2009 Prentice Hall. All rights reserved. 28

Learning Objective 9 Explain and journalize petty cash transactions

Petty Cash fund kept on hand to pay for small expenditures Controls needed: ◦ Designate a custodian of petty cash fund ◦ Keep a specific amount of cash on hand ◦ All fund payments are supported with a petty cash ticket Copyright (c) 2009 Prentice Hall. All rights reserved. 30

Set Up Petty Cash Fund Check written for designated amount and cashed Journal entry: General Journal Page 8 Date May Account Titles and Description 1 Petty cash PR Dr. Cr. $$$ Cash $$$ Copyright (c) 2009 Prentice Hall. All rights reserved. 31

Making Payments A numbered ticket is prepared for each expenditure Petty Cash Ticket No. 15 May 2, 2009 Date: _________ Paid to: ________ Foster’s Office Supply For: __________ Office Supplies $8. 00 Amount: ________ Sharon Kahl Approved by: ______ Carol Miller Payment received by: ______ Debit Account No. : _____ Supplies Expense – Account No. 615 Copyright (c) 2009 Prentice Hall. All rights reserved. 32

Making Payments Petty Cash Ticket No. 15 Date: _________ May 2, 2007 Paid to: ________ Foster’s Office Supply For: __________ Office Supplies $8. 00 Amount: ________ Sharon Kahl Approved by: ______ Carol Miller Payment received by: _______ Debit Account No. : _____ 615 Petty Cash Copyright (c) 2009 Prentice Hall. All rights reserved. 33

Imprest System Maintaining petty cash at its designated balance Money in petty cash plus the receipts should always equal designated balance Petty cash balance Copyright (c) 2009 Prentice Hall. All rights reserved. 34

Replenish Petty Cash Total amounts on petty cash tickets Add to cash remaining in fund ◦ Should equal petty cash fund balance ◦ If it doesn’t, missing amount is Cash short and over Journal entry prepared to record expenditures A new check is cashed to replenish fund to its original balance Cash is placed in petty cash box Copyright (c) 2009 Prentice Hall. All rights reserved. 35

Cash Short and Over Account used whenever a cash fund is short or over May have either a debit or credit balance Reported as expense or revenue depending on ending balance Copyright (c) 2009 Prentice Hall. All rights reserved. 36

Replenish Petty Cash Fund General Journal Page 8 Date Account Titles and Description Aug 31 Office supplies Delivery expense PR Dr. Cr. 60 30 Cash short & over 8 Cash 82 Replenish petty cash fund Copyright (c) 2009 Prentice Hall. All rights reserved. 37

Exercise 7 -23 #1 The imprest system requires that the petty cash box contains cash and receipts that total the amount of the imprest balance. This clearly identifies the amount of cash for which the custodian is responsible, and that is the system’s main internal control feature. General Journal #2 Date Account Titles and Description PR Dec 1 Petty cash Cash Dr. Cr. $150 Copyright (c) 2009 Prentice Hall. All rights reserved. 38

Exercise 7 -23 (continued) General Journal Date Account Titles and Description Dec 31 Office supplies PR Dr. Cr. 111 Delivery expense 30 Cash 136 Cash short & over Copyright (c) 2009 Prentice Hall. All rights reserved. 5 39

Learning Objective 10 Describe ethical business issues related to accounting

Business Ethics Analyzing right from wrong Most companies have a code of ethics Accountants held to higher standard Ethical decision making ◦ ◦ Define the situation Specify alternatives Identify consequences Make the decision Copyright (c) 2009 Prentice Hall. All rights reserved. 41

End of Chapter 7