1. Chapter 7

2. Define internal control

3.  Organizational plan and all the related measures to: 3 Copyright (c) 2009 Prentice Hall. All rights reserved. Safeguard assets Encourage employees to follow company policies Ensure accurate, reliable accounting records Promote operational efficiency

4. Explain the Sarbanes-Oxley Act

5.  Congress passed SOX after the Enron and WorldCom scandals  Provisions include: ◦ Public companies must issue an internal control report ◦ Created Public Company Accounting Oversight Board  Oversees work of auditors of public companies ◦ Accounting firms may not both audit and provide consulting services to the same company ◦ Stiff penalties for violators  20 – 25 years in prison 5Copyright (c) 2009 Prentice Hall. All rights reserved.

6. List and describe the components of internal control and control procedures

7.  M onitoring of controls  I nformation System  C ontrol procedures  Control E nvironment  R isk Assessment 7Copyright (c) 2009 Prentice Hall. All rights reserved. MICER Acronym to remember five components

8.  Competent, reliable and ethical personnel ◦ Trained and supervised  Assignment of responsibilities ◦ Each employee has clearly defined responsibilities  Separation of duties ◦ Operations separate from accounting ◦ Custody of assets separate from accounting  Audits ◦ Accounting records should be examined regularly  Documents ◦ Invoices should be pre-numbered 8Copyright (c) 2009 Prentice Hall. All rights reserved.

9.  Electronic Devices ◦ Inventory sensors  Other controls ◦ Alarms and security cameras ◦ Loss-prevention specialists ◦ Bonding employees ◦ Mandatory vacations Copyright (c) 2009 Prentice Hall. All rights reserved.9

10. Explain control procedures unique to e-commerce

11.  Risks ◦ Stolen credit card numbers and passwords ◦ Computer viruses and Trojans ◦ Phishing  Security measures ◦ Encryption ◦ Firewalls 11Copyright (c) 2009 Prentice Hall. All rights reserved.

12.  Collusion: ◦ Two or more employees work together to defraud the company  Cost: ◦ The stricter the internal control, the greater the cost 12Copyright (c) 2009 Prentice Hall. All rights reserved.

13. Apply internal controls to cash receipts

14.  Receipt is issued for each transaction  Cash drawer opens when a transaction is entered  At the end of a shift, manager proves cash by comparing cash in drawer with machine’s record of sales  At least once a day, cashier deposits cash in bank  Register tape sent to accounting department 14Copyright (c) 2009 Prentice Hall. All rights reserved.

15.  Beginning Balance Add: Deposits Less: Withdrawals ----------------------------------- Ending Balance  Question: Does the Ending Balance equal what we count out the balance to be? ◦ In case of the bank statement, we must first adjust the bank statement to reflect  Deposits in transit  Outstanding Checks (ones that haven’t been cashed) Copyright (c) 2009 Prentice Hall. All rights reserved.15

16.  Key: Separate accounting records (posting the credit to Accounts Receivable and other accounts from posting the debit to cash)  Incoming mail opened by a mailroom employee  Customer checks sent to treasurer and cashier deposits money in bank  Remittance advice sent to accounting for journal entries  Controller compares records of ◦ The day’s bank deposit amount from treasurer ◦ The debit to Cash made by the accounting department (which will have to tie to the credit to Accounts Receivable) 16Copyright (c) 2009 Prentice Hall. All rights reserved.

17. Apply internal controls to cash payments

18.  Important internal control  Check provides record of payment  Must be signed by an authorized official who reviews documents supporting the payment ◦ This separates the actual writing of the check from the accounting records of it Copyright (c) 2009 Prentice Hall. All rights reserved.18

19. Document Purchase order Invoice (will be received by accounting department) Receiving report (will be initiated in shipping) Check Action Company requests goods from supplier Supplier sends goods Company receives goods Company pays for goods Copyright (c) 2009 Prentice Hall. All rights reserved.19

20.  The documents that record the transaction are SEPARATED from the goods involved in the transaction  Employees must collude to defraud the company Copyright (c) 2009 Prentice Hall. All rights reserved.20

21. Describe ethical business issues related to accounting

22.  Analyzing right from wrong  Most companies have a code of ethics  Accountants held to higher standard  Ethical decision making ◦ Define the situation ◦ Specify alternatives ◦ Identify consequences ◦ Make the decision 22Copyright (c) 2009 Prentice Hall. All rights reserved.

23.  Do you think that Enron executives felt they had “crossed the line” or did they look down one day to discover they had finally stepped over it.  Favorite movie to watch for “ethics” is the Rainmaker ◦ Ethics of purpose, ethics of procedure ◦ Ethics of purpose, no ethics of procedure (the end, justifies the means) ◦ No ethics of purpose, ethics of procedure (harming people but doing it within the law) ◦ No ethics of purpose and no ethics of procedure  As accountants, we are asked often to “lie with numbers” Copyright (c) 2009 Prentice Hall. All rights reserved.23

24. Demonstrate the use of a bank account as a control device

25. Copyright (c) 2009 Prentice Hall. All rights reserved.25 Signature card Deposit ticket Check Bank statement Bank reconciliation

26. Prepare a bank reconciliation and the related journal entries

27.  Cash account in general ledger  Bank statement Copyright (c) 2009 Prentice Hall. All rights reserved.27 Timing differences due to time lag in recording transactions Usually show different balances A bank reconciliation is prepared to explain these differences

28.  We have to FIRST figure out the correct balance for cash in the bank account ◦ It is NOT the bank’s balance  Does not show deposits in transit  Does not show outstanding checks ◦ It is NOT the general ledger balance  Does not show unrecorded deposits  Does not show unrecorded withdrawals  Service charges  Reconciling petty cash fund is easier ◦ we can count the balance in the drawer and reconcile to it Copyright (c) 2009 Prentice Hall. All rights reserved.28

29.  See separate handouts Copyright (c) 2009 Prentice Hall. All rights reserved.29

30. Explain and journalize petty cash transactions

31.  Cash fund kept on hand to pay for small expenditures  Controls needed: (Separate custody of asset from accounting) ◦ Designate a custodian of petty cash fund ◦ Keep a specific amount of cash on hand ◦ All fund payments are supported with a petty cash ticket which shows  the amount taken out of the drawer,  who took it, and  reason for the withdrawal (so we know what account needs to be debited) ] 31Copyright (c) 2009 Prentice Hall. All rights reserved.

32.  At ANY time, we can count the cash and the petty cash tickets and these should total up to the amount established for the petty cash fund  Key: It works like an inventory account  Beginning Balance Add: Deposits (There are NONE) Less: Withdrawals ----------------------------------- Ending Balance (if this doesn’t count to the amount in the petty cash drawer, we have “shrinkage” which we call “cash over & short” Copyright (c) 2009 Prentice Hall. All rights reserved.32

33.  Check written for designated amount and cashed  Journal entry: Copyright (c) 2009 Prentice Hall. All rights reserved.33 General Journal Page 8 DateAccount Titles and DescriptionPRDr.Cr. May 1Petty cash $$$ Cash $$$

34. 34 Petty Cash Ticket No. 15 Date: _________________ Amount: ________________ Paid to: _______________ For: ___________________ Debit Account No.: _________ May 2, 2009 $8.00 Foster’s Office Supply Office Supplies Sharon Kahl Carol Miller Supplies Expense – Account No.615 A numbered ticket is prepared for each expenditure Copyright (c) 2009 Prentice Hall. All rights reserved. Approved by: ___________ Payment received by: ___________

35. 35 Petty Cash Ticket No. 15 Date: _________________ Amount: ________________ Paid to: _______________ For: ___________________ Approved by: ____________ Payment received by: _____________ Debit Account No.: _________ May 2, 2007 $8.00 Foster’s Office Supply Office Supplies Sharon Kahl Carol Miller 615 Petty Cash Copyright (c) 2009 Prentice Hall. All rights reserved.

36.  Maintaining petty cash at its designated balance  Money in petty cash plus the receipts should always equal designated balance Copyright (c) 2009 Prentice Hall. All rights reserved.36 Petty cash balance

37.  Total amounts on petty cash tickets  Add to cash remaining in fund ◦ Should equal petty cash fund balance ◦ If it doesn’t, missing amount is Cash short and over  Journal entry prepared to record expenditures  A new check is cashed to replenish fund to its original balance  Cash is placed in petty cash box 37 Copyright (c) 2009 Prentice Hall. All rights reserved.

38.  Account used whenever a cash fund is short or over  May have either a debit or credit balance  Reported as expense or revenue depending on ending balance 38Copyright (c) 2009 Prentice Hall. All rights reserved.

39. 39 General Journal Page 8 DateAccount Titles and DescriptionPRDr.Cr. Aug 31Office supplies60 Delivery expense30 Cash short & over 8 Cash82 Replenish petty cash fund Copyright (c) 2009 Prentice Hall. All rights reserved.

40.  The check we write for $82 is written for “cash” which we cash at the bank and then put the $82 cash in the petty cash drawer.  The check will carry a “memo” line “to replenish petty cash” Copyright (c) 2009 Prentice Hall. All rights reserved.40

41. Copyright (c) 2009 Prentice Hall. All rights reserved.41 The imprest system requires that the petty cash box contains cash and receipts that total the amount of the imprest balance. This clearly identifies the amount of cash for which the custodian is responsible, and that is the system’s main internal control feature. #1 General Journal DateAccount Titles and DescriptionPRDr.Cr. Petty cashDec 1$150 Cash$150 #2

42. Copyright (c) 2009 Prentice Hall. All rights reserved.42 General Journal DateAccount Titles and DescriptionPRDr.Cr. Dec31Office supplies111 Delivery expense30 Cash136 Cash short & over5