1. INTERNAL CONTROL AND CASH STUDY OBJECTIVES After studying this chapter, you should understand: Definition of internal controlPetty Cash Principles of internal control Control features of a bank account Internal control for cash receiptsBank reconciliations Internal control for cash disbursementsCash reporting

2. The plan of organization and all related methods and measures adopted by a business in order to: STUDY OBJECTIVE 1 DEFINITION OF INTERNAL CONTROL STUDY OBJECTIVE 1 DEFINITION OF INTERNAL CONTROL Safeguard assets Enhance accuracy and reliability of accounting records

3. STUDY OBJECTIVE 2 PRINCIPLES OF INTERNAL CONTROL STUDY OBJECTIVE 2 PRINCIPLES OF INTERNAL CONTROL Other Controls Documentation procedures Independent internal verification Segregation of duties Physical, mechanical, & electronic controls Establishment of responsibility

4. Control is most effective when only one person is responsible for a given task. ESTABLISHMENT OF RESPONSIBILITY Only one cashier should operate a cash register during a shift. Cash is reconciled at the beginning and end of the shift.

5. Related activities should be assigned to different employees Record-keeping separate from custody SEGREGATION OF DUTIES The cashier should not update the accounting records.

6. Documents are pre-numbered Sequence is accounted for Documents are forwarded to accounting department promptly DOCUMENTATION PROCEDURES Checks have sequential numbers. Missing check numbers are investigated.

7. Designed to safeguard assets and accounting records Also designed to restrict access PHYSICAL, MECHANICAL, & ELECTRONIC CONTROLS Bank vault Locked warehouse Access codes Passwords Alarms Time clocks

8. Review, comparison, & reconciliation of data prepared by another employee On a surprise basis By an independent person Discrepancies noted and reported INDEPENDENT INTERNAL VERIFICATION Manager compares daily sales summaries with cash register tapes. INTERNAL AUDIT DEPARTMENT

9. Bonding employees who handle cash Rotation of duties Mandatory vacation OTHER CONTROLS Mandatory vacations make it impossible for a bookkeeper to permanently conceal “irregular” activities.

10. Independent Internal Verification Accounting Employee A Assistant Cashier B Assistant Treasurer C Segregation of Duties SEGREGATION OF DUTES VS. INDEPENDENT INTERNAL VERIFICATION SEGREGATION OF DUTES VS. INDEPENDENT INTERNAL VERIFICATION Maintains cash balance per books Maintains custody of cash on hand Makes monthly comparisons. Reports differences to treasurer.

11. LIMITATIONS OF INTERNAL CONTROL LIMITATIONS OF INTERNAL CONTROL Cost-Benefit Considerations The cost of implementing a control should be less than the perceived benefit. Human Element A system is only as good as the people operating it. Collusion Two people may conspire to override a control

12. Only designated personnel are authorized to handle or have access to cash receipts. Different individuals should: 1 receive cash 2 record cash receipt transactions 3 have custody of cash STUDY OBJECTIVE 3 INTERNAL CONTROL FOR CASH RECEIPTS STUDY OBJECTIVE 3 INTERNAL CONTROL FOR CASH RECEIPTS

13. Register tapes, remittance advices and deposit slips Cash should be stored in safes and bank vaults Access to storage areas should be limited to authorized personnel Cash registers should be used in executing over-the-counter receipts INTERNAL CONTROL FOR CASH RECEIPTS

14. Daily cash counts and daily comparisons of total receipts. All personnel who handle cash receipts are bonded and required to take vacations. Cash registers are visible to customers. INTERNAL CONTROL FOR CASH RECEIPTS

15. Payments made by pre-numbered check. Pay only approved invoices. Limit & specify check-signing authority. Store blank checks in a safe, and limit access. Separate approval and payment functions Stamp invoices when paid. STUDY OBJECTIVE 4 INTERNAL CONTROL FOR CASH DISBURSEMENTS STUDY OBJECTIVE 4 INTERNAL CONTROL FOR CASH DISBURSEMENTS

16. Enhances control over cash disbursements. A network of approvals by authorized individuals acting independently to ensure that disbursements by check are proper. A voucher is an authorization form prepared for each expenditure. Vouchers are recorded in a journal called the voucher register. VOUCHER SYSTEM

17. The use of pre-numbered checks in disbursing cash is an application of what internal control principle? REVIEW QUESTION Answer: Documentation procedures

18. A disbursement system that uses wire, phone, or computer to transfer cash. Regular payments such as those for house, car, and utilities are frequently made by EFT. EFT SYSTEM

19. Used to pay small amounts An IMPREST SYSTEM involves: 1 establishing the fund 2 making payments from the fund 3 replenishing the fund Accounting entries are required when: 1 the fund is established 2 the fund is replenished 3 the amount of the fund is changed STUDY OBJECTIVE 5 PETTY CASH FUNDS STUDY OBJECTIVE 5 PETTY CASH FUNDS

20. Two steps to establish a petty cash fund 1 appoint a responsible custodian who will be responsible 2 determine the size of the fund (to cover 3-4 weeks) ESTABLISHING THE FUND 100 The check is written to the custodian.

21. On March 15 the petty cash custodian requests a check for $87. The fund contains $13 cash and petty cash receipts for postage $44, freight-out $38, and miscellaneous expenses, $5. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit Mar. 15Postage Expense Freight-out Miscellaneous Expense Cash (To replenish petty cash fund) 44 38 5 87 REPLENISHING THE FUND Custodian initiates request for reimbursement. Custodian prepares a schedule of payments with documentation Treasurer approves replenishment.

22. Using a bank minimizes currency that must be kept on hand and contributes significantly to good internal control over cash. A company can safeguard its cash by using a bank as a depository and as a clearing house. STUDY OBJECTIVE 6 CONTROL FEATURES--BANKS STUDY OBJECTIVE 6 CONTROL FEATURES--BANKS

23. A written order signed by the depositor directing the bank to pay a specified sum of money to a designated recipient. Three parties to a check are: 1 Maker/drawer issues the check 2 Bank/payer on which check is drawn 3 Payee to whom check is payable WRITING CHECKS

24. A bank statement shows: 1 checks paid & other debits charged against the account 2 deposits and other credits made to the account 3 account balance after each day’s transactions A bank statement shows: 1 checks paid & other debits charged against the account 2 deposits and other credits made to the account 3 account balance after each day’s transactions BANK STATEMENTS Debit memorandum indicate charges against the depositor’s account. (ATM service charges). Credit memorandum indicate amounts that increase the depositor’s account. (Interest income).

25. Reconciliation is necessary because the balance per bank and balance per books are seldom in agreement due to time lags and errors. Reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash. STUDY OBJECTIVE 7 RECONCILING THE BANK ACCOUNT STUDY OBJECTIVE 7 RECONCILING THE BANK ACCOUNT

26. Steps in preparing a bank reconciliation: 1 Determine deposits in transit 2 Determine outstanding checks 3 Note any errors discovered 4 Trace bank memoranda to the records Each reconciling item used in determining the adjusted cash balance per books should be recorded by the depositor. RECONCILING THE BANK ACCOUNT

27. LAIRD COMPANY Bank Reconciliation April 30, 2006 Cash balance per bank statement $ 15,907.45 Add: Deposits in transit 2,201.40 18,108.85 Less: Outstanding checks No. 453 $ 3,000.00 No. 457 1,401.30 No. 460 1,502.70 5,904.00 Cash balance per books $ 11,589.45 Add: Collection of $1,000 note receivable plus interest earned $50, less collection fee $15 $ 1,035.00 Error in recording check 443 36.00 1,071.00 12,660.45 Less: NSF check 425.60 Bank service charge 30.00 455.60 Adjusted cash balance per bank $ 12,204.85 Adjusted cash balance per books $ 12,204.85 The bank statement for the Laird Company shows a balance per bank of $15,907.45 on April 30, 2006. On this date the balance of cash per books is $11,589.45. BANK RECONCILIATION

28. Collection of Note Receivable. This entry involves four accounts. Interest of $50 has not been accrued and the collection fee is charged to Miscellaneous Expense. 1035 15 1000 50 ENTRIES FROM THE BANK RECONCILIATION ENTRIES FROM THE BANK RECONCILIATION

29. Book Error. An examination of the cash disbursements journal shows that check No. 443 was a payment on account to Andrea Company, a supplier. The check, with a correct amount of $1,226.00, was recorded at $1,262.00. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit Apr. 30Cash Accounts Payable — Andrea Company (To correct error in recording check No. 443) 36 ENTRIES FROM THE BANK RECONCILIATION ENTRIES FROM THE BANK RECONCILIATION

30. NSF Check An NSF check becomes an accounts receivable to the depositor. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit Apr. 30Accounts Receivable — J. R. Baron Cash (To record NSF check) 425.6 ENTRIES FROM THE BANK RECONCILIATION ENTRIES FROM THE BANK RECONCILIATION

31. Bank Service Charges Check printing charges (DM) and other bank service charges (SC) are debited to Miscellaneous Expense because they are usually nominal in amount. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit Apr. 30Miscellaneous Expense Cash (To record charge for printing company checks) 30 ENTRIES FROM THE BANK RECONCILIATION ENTRIES FROM THE BANK RECONCILIATION

32. Which of the following items requires an adjusting entry by the depositor? 1.Outstanding checks 2.Deposits in transit 3.A bank error 4.Bank service charges REVIEW QUESTION Answer: Bank service charges

33. Cash reported on the Balance Sheet includes: 1 Cash on hand (includes petty cash) 2 Cash in banks Cash is the most liquid asset Cash is listed first in the balance sheet. Cash equivalents are investments with maturities of 3 months or less, such as money market funds, CD’s, and treasury bills and notes. STUDY OBJECTIVE 8 REPORTING CASH STUDY OBJECTIVE 8 REPORTING CASH