2 system of internal control. Set up an effectivesystem of internal control.
3 Internal Control Safeguard assets. Promote operational efficiency. It is the organizational plan and all therelated measures that an entity adopts.Encourage Adherence to company policies.Safeguard assets.Ensure Accurate and reliable accounting records.Promote operational efficiency.
4 Components of an Effective System Competent, reliable, and ethical personnelAssignment of responsibilitiesAuthorizationRecordingCustodySeparation of duties
5 Separation of Duties Separation of the Authorization of transactions from the Recording of transactionsfrom the Custody of assets
6 Internal and External Audits An audit is an examination by an outside partyof the company’s financial statements,accounting systems, and internal controls.An internal auditor is an employee of the business.An external auditor is an independent auditor.
7 Business documents and records include: invoices (bills)paid checksaccounting journalsaccounting ledgers
8 Electronic and Computer Controls Businesses use electronic devices to safeguard assets.
9 The Onion Model of E-Commerce System Security SensitiveHardware,Software,and DataEncryptionFirewallsIntrusion detection devicesIncident response proceduresAudits by external specialists
10 Encryption It is the transformation of data by a mathematical process into a form that is unreadable by anyonewho does not have the secret decryption key.Same keyClearmessageEncryptionEncodedDecryption
11 Firewall Internet Passwords Other codes It is a technique that limits access to hardware,software, or data to persons within a network.InquirersCustomersHackersFirewall 1Firewall 2Firewall 3InternetPasswordsOther codes
12 Other Controls – Fireproof vaults – Burglar alarms – Point of sale terminals– Frequent bank deposits– Mandatory vacations– Job rotation
13 The Limitations of Internal Control Systems designed to thwart one person’sfraud can be beaten by two or moreemployees working together –colluding – to defraud the firm.A system of internal control that is toocomplex can be inefficient.
15 The Bank Reconciliation There are two records of a business’s cash:the company’s cash accounton its own books, and…1the bank statement, which shows theactual amount of cash in the bank.2
16 The Bank Reconciliation Two common items that cause differencesbetween the bank balance and the book balance.1. Items recorded by the company but not yetrecorded by the bank:– Deposits in transit– Outstanding checks
17 The Bank Reconciliation 2. Items on a bank statement and notrecorded by the business:– Bank collections– Electronic funds transfers– Service charge– Interest revenue earned on account– NSF checks– Errors
18 Bank Reconciliation Illustrated The bank statement of Business Research, Inc.,shows a balance of $5, on January 31.The company Cash account on thebooks has a balance of $3,The following reconciling itemsexplain why the two balances differ:
19 The Bank Reconciliation Illustrated 1. The January 30 deposit of $1,591.63does not appear on the bank statement.2. The bank erroneously charged to theaccount a $100 check (No. 656) notwritten by Business Research Associates.3. Five company checks issued late inJanuary and recorded in the journalhave not been paid by the bank.
20 The Bank Reconciliation Illustrated Check No Date AmountJan $Total $1,350.14
21 The Bank Reconciliation Illustrated 4. The bank received $ by EFTon behalf of Business Research, Inc.5. The bank collected on behalf of thecompany a note receivable, $2,114(including interest revenue of $214).6. The bank statement shows interestrevenue of $28.01.
22 The Bank Reconciliation Illustrated 7. Check number 333 for $150 paid to Brown Companyon account was recorded as a cash payment of $510.8. The bank service charge for the month was $14.25.9. The bank statement shows an NSF check for $52.10. Business Research pays insurance expense byEFT and has not recorded this $361 payment.
23 The Bank Reconciliation Illustrated Balance per bank, January 31 $5,931.51Add deposit in transit ,591.63Check erroneously charged$7,623.14Less outstanding checks –1,350.14Adjusted bank balance $6,273.00
24 The Bank Reconciliation Illustrated Balance per books, January $3,294.21Add: ETF receipt of rent revenueCollection of note receivable ,114.00Interest revenue earnedCorrection of book error$6,700.25Less: Service charge $NSF checkPayment of insurance expense –Adjusted book balance $6,273.00
25 Apply internal controls to cash receipts andcash payments.
26 Controlling and Managing Cash Internal control over cash receipts ensuresthat all cash receipts are deposited in thebank and no collections are lost.
27 Over the Counter Receipts The point-of-sale terminal (cash register) offerscontrol over the cash received in a store.
28 Mail Receipts All incoming mail should be opened by a mailroom employee.This person should compare the checkreceived with the remittance advice.The mailroom clerk keeps a runningtotal of cash receipts for the day.
29 Mail Receipts Many companies use a lock-box system. Customers send checks directly to anaddress that is essentially a bank account.
30 Internal Controls Over Cash Receipts Element ofInternal ControlInternal Controls overCash ReceiptsCompetent, reliable,ethical personnelCarefully screen andtrain employees.Proper authorizationOnly designated employees cangrant exceptions for customers.
31 Internal Controls Over Cash Receipts Separation of dutiesEmployees who handle cash do nothave access to accounting records.Internal: management policiesExternal: control over cash receiptsInternal andexternal auditsElectronic andcomputer controlsMatch receipts with remittancesand bank deposit ticket daily.
32 Internal Control: Payments Purchasing Process Purchase request(requisition)SalesdepartmentPurchasingBusiness DocumentPrepared bySent toPurchase orderPurchasingdepartmentSupplierInvoice (bill)SupplierAccountingdepartmentReceiving reportReceivingdepartmentAccountingDisbursementpacketAccountingdepartmentOfficer whosigns the check
34 Internal Controls Over Cash Payments Element ofInternal ControlInternal Controls overCash PaymentsCompetent, reliable,ethical personnelPayments entrusted to high levelemployees and the treasurer.Proper authorizationLarge expenditures must beauthorized by top management.
35 Internal Controls Over Cash Payments Separation of dutiesEmployees who handle checks haveno access to accounting records.Internal: management policiesExternal: control over cash paymentsInternal andexternal auditsElectronic andcomputer controlsComputer programmers do notoperate the computers.
37 Using a Budget to Manage Cash A budget is a financial plan thathelps coordinate business activities.A cash budget helps a company,or an individual, manage cash byplanning the receipt and paymentof cash during a future period.
38 Cash Budget Example 1. Cash balance, February1, 20x2 $ 202.6 Estimated cash receipts:2. Collections from customers ,858.33. Interest and dividends on investments4. Sale of store fixtures$3,072.0Estimated cash payments:5. Purchases of inventory $1,906.26. Operating expenses7. Expansion of existing stores8. Opening of new stores9. Payment of long-term debtPayment of dividends ,385.911. Net cash position at January 31, 20x (111.3)12. Budgeted / Desired cash balance, January 31, 20x13. Additional cash needed to meet desired 1/31/x3 balance $Cash Budget For the Year Ended January 31, 20x3(In millions)
39 Reporting Cash on the Balance Sheet Companies usually combine all cash amountsinto a single total called “Cash and CashEquivalents” on the balance sheet.Cash equivalents include liquid assets…Time depositsCertificates of deposit
40 Reporting Cash on the Balance Sheet America Online, Inc.Consolidated Balance SheetDecember 31 Excerpts(In Millions)AssetsCurrent assets:Cash and cash equivalents $2,610Short-term investmentsAccounts receivable
42 Ethics and Accounting Most large companies have a code of ethics designed to encourage ethical andresponsible behavior by employees.Accountants have additionalincentives to behave ethically.AICPA Code of Professional ConductStandards of Ethical Conductfor Management Accountants
43 Ethics and Accounting Conflict of Interest Business transactions EnronCorporationA. Fastow, CEOOutsidePartnershipA. Fastow,PrincipalBusinesstransactions