Sarbanes-Oxley, Internal Control & Cash

ACG 2021: Chapter 7

Sarbanes-Oxley Act of 2002

This act is considered one of the most important and significant laws affecting publicly held companies in recent history.

Publicly held companies –are those traded on public exchanges Purpose is to restore public confidence and trust in the financial statements of

companies. Emphasizes the importance of internal control.

Internal Control – as the procedures and processes used by a company to safeguard its assets, process information accurately, and ensure compliance with laws and regulations.

Requires companies to maintain strong and effective internal controls over the recording of transactions and preparation of financial statements.

To deter fraud and prevent misleading financial statements. Requires companies and their independent accountants to report on the

effectiveness of the company’s internal controls

Sarbanes Oxley

Caused by Enron Worldcom Tyco

Internal Controls

are the policies and procedures that: protect assets from

misuse, ensure that business

information is accurate, ensure that laws and

regulations are being followed

Objectives of Internal Controls

Provides reasonable assurance that Assets are safeguarded

and used for business purposes

Business information is accurate

Employees comply with laws and regulations

Elements

Control environment Risk assessment Control procedures Monitoring Information and

communication

Control procedures

Competent personnel Rotating duties Mandatory vacations Separating

responsibilities Separating operations Proof and security

measures

Cash Controls over Receipts and Payments

Cash – includes coins, currency, checks, money orders, and money on deposit

Businesses may have more than one cash account.

Operating account Payroll account Savings account

Control of Cash Receipts

To protect cash from theft and misuse, a business must control cash from the time it is received until it is deposited in a bank.

Two main sources of cash: Customers purchasing products or services Customers making payments on account

Cash Received from Cash Sales:

Regardless of the source of cash receipts, every business must properly safeguard and record its cash receipts.

Cash registers help minimize risk Change fund – amount in each drawer at the

beginning of a shift.

Cash in Register

Cash register Change fund: monies at

the start of the shift At the end of the day,

monies in the register may not equal what is should be

Short – too little – an expense to the business

Over – too much – revenue to the business

Recording of Difference

Cash short and over New account Classification depends on balance Short => Debit = expense Over => Credit = revenue

Cash Short and Over

Example: Cash sales show $2,000 and cash in drawer is $2,005.

Date Account PR Debit Credit

Cash $2,005

Cash short and over 5

Sales 2,000

Cash short and Over

Example 2:: Suppose that cash sales are $3,500 and cash in drawer is $3,400.

Cash short and Over

Cash short & Over

Debit

Short

Results in expense

Credit

Over

Results in revenue

Cash Control over Receipts

Cash Received by Mail: Lock box Cash controls

Cash Received by EFT: EFT – electronic funds transfers Most companies encourage automatic electronic transfers by

customers Term used in the auditor’s opinion of the internal control environment

Less costly Enhance internal controls

Control of Cash Payments

Control of cash payments should provide reasonable assurance that payments are made for only authorized transactions.

Voucher system Set of procedures for authorizing and recording liabilities

to pay cash or issue an electronic funds transfer.

Cash paid by EFT Payroll systems

Bank Accounts and Bank Reconciliation

Bank accounts are used for control purposes Reduces the amount of cash on hand at any one time Provide independent recording of cash transactions Facilitates the transfer of funds Terminology:

Bank statement – a summary of transactions Credit – increase in bank balance

ACH: automated clearing house entry for EFT MS – miscellaneous credit

Debit – decrease in bank balance NSF – not sufficient funds check SC – service charge ACH: automated clearing house entry for EFT

Bank Reconciliation

The reasons for the difference between the cash balance on the bank statement and the cash balance in the accounting records should be analyzed by preparing a bank reconciliation.

It is an analysis of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger in order to determine the adjusted cash balance.

Bank Reconciliation

Steps in Bank Reconciliation: Compare deposits on the bank statements with the ledger

Compare checks on the bank statements with the ledger Add credit memo that have not been recorded to the balance

according to the company’s records. Deduct debit memo that have not been recorded form the balance

according to the company’s records. List any errors discovered during the preceding steps.

Beginning balance $3,359.78 Beginning balance $2,549.99Add deposit not recorded by bank 816.20

$4,175.98

Add note and interest collected by bank

408.00$2,957.9

9Deduct outstanding checks:

No. 812 $1,061.00No. 878 435.39No. 883 48.60

1,544.99

Deduct check NSF $300.00

Bank service charges 18.00

Adjusted balance $2,630.99 Adjusted balance $2,630.99

51

Company’s recordsBank’s records

Error recording Check No. 879 9.00

7-5

327.00

52

7-5Bank Reconciliation for Power Networking

55

July 31 Cash 408 00

Note collected by bank.

Notes Receivable 400 00

Interest Income8 00

Entry to Record Plus Items 7-5

57

July 31 Cash 408 00

Note collected by bank.

Notes Receivable 400 00

Interest Income8 00

31 Accounts Receivable—Thomas Ivey 300 00 Miscellaneous Expense 18 00 Accounts Payable—Taylor Co. 9 00 Cash 327 00

NSF check, bank service charges, and error in recording Check no. 879.

Entry to Record Minus Items 7-5

Example

Deposit on July 31 not recorded on bank statement $816.20 Checks outstanding No 12 $1,061.00, No 8 $435.39, No 3 $48.60 Note plus interest of $8 collected by the bank $408.00 Check from customers return by bank because of insufficient funds

$300.00 Bank service charge $18 Check No 23 recorded as $723.26 when it was actually $732.26. Bank balance on statement $3359.78 Book balance per general ledger $2549.99

Do a bank reconciliation and prepare entries.

Petty Cash

Fund for small cash expenses Supplies Postage Food Parking

Petty Cash is an asset account

Petty Cash Entries

Establish the fund: Check written to petty cash for $500.

Date

Account PR Debit Credit

Petty cash 500

Cash 500

Petty Cash Entries

Reimburse the account Example 1: Suppose that petty cash fund as the following receipts:

office supplies $200, Miscellaneous $100, reimburse the account.

Date Account PR Debit Credit

Office supplies 200

Miscellaneous expense

100

Cash 300