Presentation on theme: "Sarbanes-Oxley, Internal Control & Cash"— Presentation transcript:
1 Sarbanes-Oxley, Internal Control & Cash ACG 2021: Chapter 7
2 Sarbanes-Oxley Act of 2002This 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 exchangesPurpose 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
4 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
5 Objectives of Internal Controls Provides reasonable assurance thatAssets are safeguarded and used for business purposesBusiness information is accurateEmployees comply with laws and regulations
6 Elements Control environment Risk assessment Control procedures MonitoringInformation and communication
7 Control procedures Competent personnel Rotating duties Mandatory vacationsSeparating responsibilitiesSeparating operationsProof and security measures
8 Cash Controls over Receipts and Payments Cash – includes coins, currency, checks, money orders, and money on depositBusinesses may have more than one cash account.Operating accountPayroll accountSavings account
9 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 servicesCustomers making payments on account
10 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 riskChange fund – amount in each drawer at the beginning of a shift.
11 Cash in Register Cash register Change fund: monies at the start of the shiftAt the end of the day, monies in the register may not equal what is should beShort – too little – an expense to the businessOver – too much – revenue to the business
12 Recording of Difference Cash short and overNew accountClassification depends on balanceShort => Debit = expenseOver => Credit = revenue
13 Cash Short and OverExample: Cash sales show $2,000 and cash in drawer is $2,005.DateAccountPRDebitCreditCash$2,005Cash short and over5Sales2,000
14 Cash short and OverExample 2:: Suppose that cash sales are $3,500 and cash in drawer is $3,400.
15 Cash short and Over Cash short & Over Debit Short Results in expense CreditOverResults in revenue
16 Cash Control over Receipts Cash Received by Mail:Lock boxCash controlsCash Received by EFT:EFT – electronic funds transfersMost companies encourage automatic electronic transfers by customersTerm used in the auditor’s opinion of the internal control environmentLess costlyEnhance internal controls
17 Control of Cash Payments Control of cash payments should provide reasonable assurance that payments are made for only authorized transactions.Voucher systemSet of procedures for authorizing and recording liabilities to pay cash or issue an electronic funds transfer.Cash paid by EFTPayroll systems
18 Bank Accounts and Bank Reconciliation Bank accounts are used for control purposesReduces the amount of cash on hand at any one timeProvide independent recording of cash transactionsFacilitates the transfer of fundsTerminology:Bank statement – a summary of transactionsCredit – increase in bank balanceACH: automated clearing house entry for EFTMS – miscellaneous creditDebit – decrease in bank balanceNSF – not sufficient funds checkSC – service charge
19 Bank ReconciliationThe 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.
20 Bank Reconciliation Steps in Bank Reconciliation: Compare deposits on the bank statements with the ledgerCompare checks on the bank statements with the ledgerAdd 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.
21 Bank’s records Company’s records 7-5Bank’s recordsCompany’s recordsBeginning balance $3,359.78Beginning balance $2,549.99Add deposit notrecorded by bankAdd note and interestcollected by bank$4,175.98$2,957.99Deduct outstandingchecks:No. 812 $1,061.00NoNo ,544.99Deduct checkNSF $300.00Bank servicecharges 18.00Error recordingCheck No327.00Adjusted balance $2,630.99Adjusted balance $2,630.9951
23 7-5 Entry to Record Plus Items July 31 Cash 408 00 Entry to Record Plus Items7-5July 31 CashNotes ReceivableInterest Income 8 00Note collected by bank.55
24 7-5 Entry to Record Minus Items July 31 Cash 408 00 Entry to Record Minus Items7-5July 31 CashNote collected by bank.Notes ReceivableInterest Income 8 0031 Accounts Receivable—Thomas IveyMiscellaneous ExpenseAccounts Payable—Taylor CoCashNSF check, bank service charges, and error in recording Check no. 879.57
25 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 $48.60Note plus interest of $8 collected by the bank $408.00Check from customers return by bank because of insufficient funds $300.00Bank service charge $18Check No 23 recorded as $ when it was actually $Bank balance on statement $Book balance per general ledger $Do a bank reconciliation and prepare entries.
26 Petty Cash Fund for small cash expenses Petty Cash is an asset account SuppliesPostageFoodParkingPetty Cash is an asset account
27 Petty Cash EntriesEstablish the fund: Check written to petty cash for $500.DateAccountPRDebitCreditPetty cash500Cash
28 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.DateAccountPRDebitCreditOffice supplies200Miscellaneous expense100Cash300