chapter 6 cash and internal controls. internal control self– study materials c1: define internal...
TRANSCRIPT
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Chapter 6
Cash and Internal Controls
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INTERNAL CONTROL SELF– STUDY MATERIALS
C1: Define internal control and identify its purpose and principles.
C2: Define cash and cash equivalents and explain how to report them.
C3: Identify control features of banking activities.
P1: Apply internal control to cash receipts and disbursements.
-VOUCHER System of control6-2
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Analytical Learning Objectives
SELF-STUDY
A1: Compute the days’ sales uncollected ratio and use it to assess liquidity.
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Procedural Learning Objectives
IN-CLASS:
P2: Explain and record petty cash fund transactions.
P3: Prepare a bank reconciliation.
NOT COVERED:P4: Appendix 6A: Describe the use of
documentation and verification to control cash disbursements.
P5: Appendix 6B: Apply the net method to control purchase discounts
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Voucher System of Control
A voucher system establishes procedures for: Verifying, approving and recording
obligations for eventual cash disbursements.
Issuing checks for payment of verified, approved and recorded obligations.
A voucher system establishes procedures for: Verifying, approving and recording
obligations for eventual cash disbursements.
Issuing checks for payment of verified, approved and recorded obligations.
P4
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Voucher System of Control
Cashier
Accounting
Receiving
Supplier (Vendor)
Purchasing
SALES Requesting
CashierAccounting, Requesting& Purchasing
Accounting
Supplier (Vendor)
Purchasing andAccounting
Supplier, Requesting, Receiving & Accounting
Check
Invoice Approval
Receiving Report
Invoice
Purchase Order
Purchase Requisition
VoucherVoucher
P4
SenderSender ReceiverReceiver
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Purpose of Internal Control
Policies and procedures managers use to: Policies and procedures managers use to:
1.1. Protect assets.Protect assets.
2.2. Ensure reliable accounting.Ensure reliable accounting.
3.3. Promote efficient operations.Promote efficient operations.
4.4. Urge adherence to company policies. Urge adherence to company policies.
Policies and procedures managers use to: Policies and procedures managers use to:
1.1. Protect assets.Protect assets.
2.2. Ensure reliable accounting.Ensure reliable accounting.
3.3. Promote efficient operations.Promote efficient operations.
4.4. Urge adherence to company policies. Urge adherence to company policies.
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The Sarbanes-Oxley Act
The Sarbanes-Oxley Act, also known as SOX, requires management and auditors of publicly held companies to adhere to or perform specific requirements, such as::
1.1. Evaluation of internal controls.Evaluation of internal controls.
2.2. Auditor’s work is overseen by the Public Company Auditor’s work is overseen by the Public Company Accounting Oversight Board (PCAOB).Accounting Oversight Board (PCAOB).
3.3. Restriction on consulting services performed by auditors.Restriction on consulting services performed by auditors.
4.4. Term limits on person leading the audit.Term limits on person leading the audit.
5.5. Harsh penalties for violators, including prison time with severe Harsh penalties for violators, including prison time with severe fines. fines.
The Sarbanes-Oxley Act, also known as SOX, requires management and auditors of publicly held companies to adhere to or perform specific requirements, such as::
1.1. Evaluation of internal controls.Evaluation of internal controls.
2.2. Auditor’s work is overseen by the Public Company Auditor’s work is overseen by the Public Company Accounting Oversight Board (PCAOB).Accounting Oversight Board (PCAOB).
3.3. Restriction on consulting services performed by auditors.Restriction on consulting services performed by auditors.
4.4. Term limits on person leading the audit.Term limits on person leading the audit.
5.5. Harsh penalties for violators, including prison time with severe Harsh penalties for violators, including prison time with severe fines. fines.
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Principles of Internal Control
1.1. Establish responsibilities.Establish responsibilities.
2.2. Maintain adequate records.Maintain adequate records.
3.3. Insure assets and Insure assets and bond key employeesbond key employees..
4.4. Separate recordkeeping from custodySeparate recordkeeping from custodyof assets.of assets.
5.5. Divide responsibility for related transactions.Divide responsibility for related transactions.
6.6. Apply technological controls.Apply technological controls.
7.7. Perform regular and independent reviews.Perform regular and independent reviews.
1.1. Establish responsibilities.Establish responsibilities.
2.2. Maintain adequate records.Maintain adequate records.
3.3. Insure assets and Insure assets and bond key employeesbond key employees..
4.4. Separate recordkeeping from custodySeparate recordkeeping from custodyof assets.of assets.
5.5. Divide responsibility for related transactions.Divide responsibility for related transactions.
6.6. Apply technological controls.Apply technological controls.
7.7. Perform regular and independent reviews.Perform regular and independent reviews.
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Technology and Internal Control
ReducedProcessing
Errors
ReducedProcessing
Errors
MoreExtensive Testing
of Records
MoreExtensive Testing
of Records
LimitedEvidence ofProcessing
LimitedEvidence ofProcessing
CrucialSeparation of
Duties
CrucialSeparation of
Duties
C 1
Increased e-commerce
Increased e-commerce
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Limitations of Internal Control
Human Error
NegligenceFatigue
MisjudgmentConfusion
Human Fraud
Intent todefeat internal
controls forpersonal gain
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Limitations of Internal Control
The costs of internal controls must not exceed their benefits.The costs of internal controls must not exceed their benefits.
CostsBenefits
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Cash and Cash EquivalentsCash
Currency, coins and amounts on deposit in bank accounts: checking accounts, and many savings accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders.
Cash Currency, coins and amounts on deposit in bank
accounts: checking accounts, and many savings accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders.
Cash Equivalents
Short-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
3. US Treasury Bills & Notes: 3-month maturity.
4. 3-month CDs and Money Market Funds
Cash Equivalents
Short-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
3. US Treasury Bills & Notes: 3-month maturity.
4. 3-month CDs and Money Market Funds6-13
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Cash & Cash Equivalents
On Dec. 31, 2010, ABC Co's total CASH COUNT =$1,000,000
The following items are included in the CASH COUNT: Petty cash funds=$12,000, Customers Checks =$3,000, Coins =$1,000 and Stamps =$100.
The following items are not included in cash count: -Three-month CD: $10,000 -Two-month Treasury Note (Bill): $7,000
Required:Prepare the Current Assets Section of the Balance Sheet
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Cash, Cash Equivalents, and Liquidity
Liquidity
How easily an asset can be converted into cash to be used to pay for services or obligations.
Liquidity
How easily an asset can be converted into cash to be used to pay for services or obligations.
InventoryInventory CashCash
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Cash Management Principles
When companies fail, one of the most common causes is their inability to manage cash.
The goals of cash management are twofold:
Plan cash receipts to meet cash payments when due.
Keep the minimum level of cash necessary to operate.
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Control of Cash
An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines:
An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines:
Handling cash is separate from
recordkeeping of cash.
Handling cash is separate from
recordkeeping of cash.
Cash receipts are promptly
deposited in a bank.
Cash receipts are promptly
deposited in a bank.
Cash disbursements are
made by check.
Cash disbursements are
made by check.
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Control of Cash Receipts
Over-the-Counter Cash Receipts
Cash register with locked-in record of transactions.
Compare cash register record with cash reported.
Over-the-Counter Cash Receipts
Cash register with locked-in record of transactions.
Compare cash register record with cash reported.
Cash Receipts By Mail Two people open the
mail. Money to cashier’s
office => Bank List to accounting
dept => Record Copy of list filed.
Cash Receipts by mail
Require four (4) people
Cash Receipts By Mail Two people open the
mail. Money to cashier’s
office => Bank List to accounting
dept => Record Copy of list filed.
Cash Receipts by mail
Require four (4) people
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Control of Cash Disbursements
All expenditures should be made by check. The only exception is for small payments from petty cash.
Separate authorization for check signing and recordkeeping duties.
Use a voucher system.
All expenditures should be made by check. The only exception is for small payments from petty cash.
Separate authorization for check signing and recordkeeping duties.
Use a voucher system.
P1
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Control of Cash Disbursements
To safeguard against theft:
-require all expenditures be made by check (except for small payments made from petty cash fund); and
-deny access to the accounting records to anyone, other than the owner, who has authority to sign checks.
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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.
Small payments required in most companies for items such as postage, courier fees, repairs and supplies.
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Operating a Petty Cash Fund
Petty Cash
CompanyCompanyCashierCashier
Petty Petty CashierCashier
May 1 Petty cash 400 Cash 400
AccountantAccountant
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Petty Cash
Operating a Petty Cash Fund
Petty Petty CashierCashier
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39¢
Stamps$45
Courier$80
Operating a Petty Cash Fund
Petty Petty CashierCashier
A petty cash fund is used only
for business expenses.
A petty cash fund is used only
for business expenses.
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Operating a Petty Cash Fund
Receipts
Petty cash receipts with
either no signature or a
forged signature usually indicate misuse of petty
cash.
Petty cash receipts with
either no signature or a
forged signature usually indicate misuse of petty
cash.
Petty Petty CashierCashier
39¢
Stamps$45
Courier$80
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Receipts
Company Company CashierCashier
$125To reimburse
petty cash fund
Use a CashOver and Short
account if needed.
Use a CashOver and Short
account if needed.
Operating a Petty Cash Fund
Petty Petty CashierCashier
May 31 Postage expense 45 Delivery expense 80
Cash 125
AccountantAccountant
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Operating a Petty Cash Fund
Sometimes, the petty cash receipts plus the cash remaining will not total to the fund balance.
i. A shortage is recorded as an expense in the reimbursing entry with a debit to the Cash Over and Short account.
ii. An overage is recorded with a credit to the Cash Over and Short account in the reimbursing entry.
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Petty Cash Example
Tension Co. maintains a petty cash fund of $400. The following summary information was taken from petty cash vouchers for July:
Travel Expenses $79.30
Customer Business Lunches 93.42
Express Mail Postage 55.00
Miscellaneous Office Supplies 32.48 $260.20
Let’s look at replenishing the fund if the
Cash Balance on July 31 was $137.80.
Tension Co. maintains a petty cash fund of $400. The following summary information was taken from petty cash vouchers for July:
Travel Expenses $79.30
Customer Business Lunches 93.42
Express Mail Postage 55.00
Miscellaneous Office Supplies 32.48 $260.20
Let’s look at replenishing the fund if the
Cash Balance on July 31 was $137.80.
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Petty Cash Example
What amount of cash will be required to replenish the petty cash fund?
a. $260.20
b. $262.20
c. $139.80
d. $137.80
What amount of cash will be required to replenish the petty cash fund?
a. $260.20
b. $262.20
c. $139.80
d. $137.80
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Petty Cash Example
What amount of cash will be required to replenish the petty cash fund?
a. $260.20
b. $262.20
c. $139.80
d. $137.80
What amount of cash will be required to replenish the petty cash fund?
a. $260.20
b. $262.20
c. $139.80
d. $137.80
Let’s prepare the journal entry to replenish the petty cash fund.
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Petty Cash Example
Dr. Cr.
Travel Expense 79.30
Entertainment Expense 93.42
Postage Expense 55.00
Office Supplies Expense 32.48
Cash Over and Short 2.00
Cash 262.20
July 31
Journal entry to replenish petty cash fund
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Quick Study 4
Exercise 5
Exercise 6
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Banking Activities as Controls
Bank AccountsBank Accounts Signature CardsSignature Cards Deposit TicketsDeposit Tickets
ChecksChecksElectronic
Funds Transfer
Electronic Funds
Transfer
Bank Statements
Bank Statements
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Bank Activities
A bank account is a record set up by a bank for a customer.
All persons authorized to write checks, sign a signature card.
Each bank deposit is supported by a deposit ticket.
Electronic Funds Transfer (EFT) is the electronic communication transfer of cash from one party to another.
To withdraw money, depositors use a check.
A check involves three parties:
Maker: Who signs the check;
Payee: The recipient;Bank (Payer): On which the check is drawn
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Bank Statement
Once a month, the bank sends each depositor a bank statement showing activities of a bank account.
A bank statement includes, at least, the following:1.Beginning cash balance per bank;
2.Check & other debits decreasing the balance;
3.Deposits & other credits increasing the balance;
4.Ending cash balance per bank.
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First National BankNashville, TN 37459 May 31, 2009
Clothes MartNashville, TN
Acct No 278609
Previous Balance Total Checks
Total Deposits
Current Balance
1488.79 1,367.09 2,604.22 2,725.92
5/1 107 55.00
5/2 1,251.88
5/4 108 279.50
5/7 109 44.75
5/9 110 21.81
5/12 111 37.55
5/15 825.04
5/18 112 175.98
5/21 113 288.31
5/27 114 12.54
5/30 527.30
5/31 115 451.65
Bank Statement
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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.
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.
First National BankNashville, TN 37459 May 31, 2009
Clothes MartNashville, TN
Acct No 278609
Previous Balance Total Checks
Total Deposits
Current Balance
1488.79 1,367.09 2,604.22 2,725.92
5/1 107 55.00
5/2 1,251.88
5/4 108 279.50
5/7 109 44.75
5/9 110 21.81
5/12 111 37.55
5/15 825.04
5/18 112 175.98
5/21 113 288.31
5/27 114 12.54
5/30 527.30
5/31 115 451.65
Bank Statement
Why are thebalances different?
Why are thebalances different?*
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Reconciling Items
Bank Statement Balance Add:
Deposits in transit. Deduct: Outstanding
Checks Add or Deduct: Bank
errors.
Adjusted Bank Balance
Bank Statement Balance Add:
Deposits in transit. Deduct: Outstanding
Checks Add or Deduct: Bank
errors.
Adjusted Bank Balance
Book Balance
• Add: Collections made by the bank.
• Add: Interest earned on checking account. =>CM
• Deduct: Nonsufficient funds check (NSF).
• Deduct: Bank service charge =>DM
• Add or Deduct: Book errors
Adjusted Book Balance.
Book Balance
• Add: Collections made by the bank.
• Add: Interest earned on checking account. =>CM
• Deduct: Nonsufficient funds check (NSF).
• Deduct: Bank service charge =>DM
• Add or Deduct: Book errors
Adjusted Book Balance.
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Reconciling ItemsIdentify and list any unrecorded Debit Memoranda (DM) from the bank for NSF Checks, service charges, and errors over stating the book balance. => Deduct them from the book balance. Identify and list any unrecorded Credit Memoranda (CM) from the bank for interest, collections, and errors under stating the book balance. => Add them to the book balance.
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Bank Reconciliation
Two sections:1. Reconcile bank statement balance to the
adjusted bank balance.2. Reconcile book balance to the
adjusted book balance.
The adjusted balances should be equal.
Two sections:1. Reconcile bank statement balance to the
adjusted bank balance.2. Reconcile book balance to the
adjusted book balance.
The adjusted balances should be equal.
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Bank Reconciliation Example
Let’s 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.
Let’s 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.
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Bank Reconciliation Example
1. Outstanding checks totaled $2,417.
2. A $500 check mailed to the bank for deposit had not reached the bank at the statement date.
3. The bank returned a customer’s NSF check for $225 received as payment on account receivable.
4. The bank statement showed $30 interest earned during July.
5. Check No. 781 for supplies expense cleared the bank for $268 but was erroneously recorded in our books as $240.
6. A $486 deposit by Acme Company was erroneously credited to our account by the bank.
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Bank Reconciliation ExampleP3
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Dr. Cr.July 31 Cash 30
Interest revenue 30
July 31 Supplies expense 28 Accounts receivable 225
Cash 253
Recording Adjusting Entries from a Bank Reconciliation
Only amounts shown on the book portion of the reconciliation require an adjusting entry.
Only amounts shown on the book portion of the reconciliation require an adjusting entry.
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Recording Adjusting Entries from a Bank Reconciliation
After posting the reconciling entries the cash account looks like this:
After posting the reconciling entries the cash account looks like this:
Adjusted balance on July 31.Adjusted balance on July 31.
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Quick Study 6
Exercise 7
Exercise 9 & 10
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Days’ Sales Uncollected
Days’Sales
Uncollected
Accounts Receivable Net Sales
× 365=
How much time is likely to pass beforewe receive cash receipts from credit sales.How much time is likely to pass beforewe receive cash receipts from credit sales.
A1
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