1. Ch.6 Cash and Internal Control Prof. J. Wang

2. Part I Internal Control

3. Internal Control System  Consists of the policies and procedures necessary to ensure: The safeguarding of an entity’s assets The reliability of its accounting records The accomplishment of its overall objectives LO3

4. Sarbanes-Oxley Act of 2002 (SOX) Act of Congress intended to bring reform to corporate accountability and stewardship in response to corporate scandals

5. Internal Control Control Environment Accounting System Internal Control Procedures

6. The Control Environment  Management’s competence and operating style  Personnel policies and practices  Influence of board of directors

7. The Accounting System  Can be manual, fully computerized, or a combination of both  Use of journals is an integral part of any system Methods and records used to report transactions and maintain financial information

8. Internal Control Procedures Segregation of Duties Safeguarding Assets and Records Proper Authorizations Independent Verification The Design and Use of Business Documents Independent Review and Appraisal LO4

9. Proper Authorizations  Authority and responsibility go hand in hand LOAN APPROVED

10. Segregation of Duties  Separate physical custody from the accounting for assets

11. Independent Verification  One individual or department acts as a check on the work of another

12. Safeguarding Assets and Records  Protect assets and accounting records from loss, theft, unauthorized use, etc.

13. Independent Review and Appraisal  Provide for periodic review and appraisal of the accounting system and the people operating it Audit Report

14. The Design and Use of Business Documents  Capture all relevant information about a transaction and assist in proper recording and classification.  Are properly controlled

15. Limitations on Internal Control  No system is entirely foolproof Employees in collusion can override the best controls Cost vs. benefit tradeoff

16. Part II Cash and Cash Equivalents

17. Cash  Coin and currency  Checking, savings, and money market accounts  Undeposited checks Pay to the order of: ABC Co. LO1

18. Cash Equivalents  Commercial paper  U.S. Treasury bills  Certain money market funds 123 45678910 11121314151617 18192021222324 25262829303127 123 45678910 11121314151617 18192021222324 25262829303127 123 45678910 11121314151617 18192021222324 25262829303127  Readily convertible to cash  Original maturity to investor of three months or less

19. Part III Cash Management and internal control over cash

20. Internal control over cash LO5  Cash receipts should be deposited intact in the bank on a daily basis  All cash disbursements should be made by check  Use petty cash for small disbursements  Prepare monthly bank reconciliation

21. Controls Over Cash Received in the Mail  Two employees open mail  Prelist prepared  Monthly customer statements

22. Document Flow for Merchandise Check Prepared Purchase Requisition Receiving Report Purchase Order Invoice Approval Purchase Invoice

23. Part IV Bank Reconciliation  Compare balance per bank statement and balance per books, and make sure all differences are accounted for.  Should be performed monthly by someone with no cash recording or custodian responsibilities.

24. Part V Petty Cash ( Used for small disbursements)

25. Petty Cash  The company established a petty cash fund of $200, to be managed by the secretary. Dr. Petty Cash 200 Cr. Cash200

26. Petty Cash Transactions for Mickey’s Marathon Sports Petty Cash Expenditures: U.S. Post Office 55.00 Overnight Delivery Service 69.50 Office Supply Express 45.30 Coin and currency per count 26.50 No entry is made when petty cash is disbursed from the fund.

27. Accounting for Petty Cash *$200.00 – ($55.00 + 69.50 + 45.30 + 26.50) = $200.00 – $196.30 = $3.70 short When the fund is replenished, a journal is made: Postage Expense55.00 Delivery Expense69.50 Office Expense45.30 Cash Over and Short* 3.70 Cash 173.50