devry Accounting 212 FINANCIAL ACCOUNTING ch04 stud

Internal Control and Cash
Chapter 4


Learn about fraud and how much it costs


Fraud
• Intentional misrepresentation of facts
• Causes injury or damage to another party
• Large problem that increases each year


Types of Fraud


Fraud Triangle
Motive

Opportunity Rationalization


Internal Control
• Primary way fraud and errors are:
• Management and Board of Directors implements a:


Objectives of Internal Control


Sarbanes-Oxley Act (SOX)
• Federal law requiring public companies to have
system of internal controls
• Provisions


Set up an internal control system


Components of Internal Control
Risk Assessment

Control Environment

Monitoring

Control Procedures Information System


Control Environment
• Tone at the top
• Key ingredient


Risk Assessment
• Identify business risks
• Establish procedures to deal with risks


Information System and Control
Procedures
• Information System
• Control procedures


Monitoring Controls
• Prohibit one employee from process transaction
completely
• Program controls into computerized system
• Hired auditors to monitor controls


Internal Control Procedures
• Smart Hiring Practices
• Separation of Duties
• Comparison and Compliance Monitoring


Internal Control Procedures
• Adequate Records
• Limited Access
• Proper Approvals


SCALP
• Smart hiring practices and segregation of duties
• Comparisons and compliance monitoring
• Adequate records
• Limited access
• Proper approvals


Information Technology (IT)
• Accounting systems rely on more than ever
before
• Basic attributes of internal control do not change
• Use of computers can greatly improve speed and
accuracy


Safeguard Controls


Internal Controls for E-Commerce
• Pitfalls of e-commerce
• Security measures


Costs and Benefits of Internal
Control
• Ways good internal control can be circumvented
• The stricter the internal control, the more it
costs


Bank Account as Control Device


Bank Account Documents
• Signature card
• Deposit ticket
• Check


The Bank Statement
• Reports
• Electronic Funds
Transfer (EFT)


Bank Reconciliation
• Two records of a business’s cash
• Amounts are usually different
• Bank reconciliation explains differences


Prepare and use a bank reconciliation


Bank Reconciliation Items
Bank Side Book Side
• ADD • ADD
• Deposits in transit • Bank collections
• Certain bank errors • Interest revenue
• SUBTRACT • EFT receipts
• Outstanding checks • Certain book errors
• Certain bank errors • SUBTRACT
• Service charges
• NSF checks
• EFT payments
• Certain book errors


Exercise 4-32B
Bank: Books:
Balance, September 30 Balance, September 30
Add: Add:
Deposit in transit EFT rent collection
Less:
Service charges
Less: NSF checks
Outstanding checks Correction of error


Summary of Reconciling Items
BANK BALANCE - ALWAYS BOOK BALANCE - ALWAYS
Add deposits in transit Add bank collections, interest
revenue and EFT receipts
Subtract outstanding checks Subtract services charges, NSF
checks, EFT payments
Add or subtract correction of bank Add or subtract correction of book
errors errors


Journalizing Bank Reconciliation
Items
• All items on the book side of the bank
reconciliation require journal entries
• If the item is added to book side
• If the items is subtracted from the book side


JOURNAL
Date Accounts and explanation Debit Credit
Cash
Interest revenue
To record interest earned on the bank statement
Cash
Accounts receivable
Account receivable collected by bank
Miscellaneous expense
Cash
Bank service charges
Accounts receivable
Cash
NSF check returned by bank


Apply internal controls to cash receipts and
cash payments


Internal Control over Cash Receipts
• Cash is easy to steal
• All transactions ultimately affect cash
• Cash receipts should be deposited quickly
• Companies can receive cash


Cash Receipts over the Counter
• Point-of-sale terminals provide control over cash
receipts
• Customer issued a receipt as proof of purchase
• Sales associate turns in cash drawer at end of
shift
• Accounting department reconciles sales per
terminal to cash in drawer


Cash Receipts by Mail
Mailroom

Remittance
Checks
advices

Accounting
Treasurer
Department

Deposit Debit to
receipt Cash

Bank Controller


Controls Over Payments by Check
• Payment by check is an internal control


Cash Payments by Check 1
Purchase
Order

2
3
Company Inventory Company
Receiving A X
Report
2

Invoice

4

Check


Internal Control for Purchasing
• Segregate the following duties


Payment Packet Receiving Report

Invoice

Purchase Order


Petty Cash
• Small fund to make minor purchases
• One employee is responsible for the accounting
• Set amount of cash
• Voucher prepared for each payment
• Sum of fund plus paid voucher should equal set
amount


Use a budget to manage cash


Budgeting
• Budget
• Cash budget
• Steps


Expected Cash Balance

If expected cash is
greater than ?
minimum needed

If expected cash is
less than minimum
?
needed


Cash Budget
Beginning cash balance
Budgeted cash receipts:
Collections from customers
Dividends from investments
Sale of plant and equipment
Budgeted cash payments:
Purchases of inventory
Operating expenses
Purchase of long-term assets
Payment of dividends
Payment of long-term debt
Cash available (needed)
Budgeted cash balance, end of period
Cash available for investing or (new
financing needed)

Exercise 4-25A
Cole Communications
Cash Budget
Cash, December 31, 2010
Budgeted Cash Receipts:
Collections from customers
Sale of assets
Budgeted Cash Payments:
Costs and services
Operating expenses
Purchase of equipment
Payment of long-term debt
Payment of dividends
Cash available
Budgeted cash available
New financing needed

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