Unit 11 October 22, 2017

Basic Information Concepts Accuracy Precision Timeliness Relevancy Validity Completeness Occurrence Integrity

Financial Statements

ARE PROVIDED TO OUTSIDERS Assertions Existence/Occurrence Completeness/Period Valuation/Allocation Rights/Obligations Presentation/Disclosure Management is assumed to make these five assertions about the financial statements ANY AND EVERY TIME Financial Statements ARE PROVIDED TO OUTSIDERS

Auditors gotta audit….

Page 233: The role of the auditor 1. Examine the financial statements and underlying accounting records 2. Assume legal/professional responsibility to the public as well as the client. 3. Determine if statements are materially correct, not absolutely correct. 4. Express an opinion as to whether the financials adhere to GAAP. 5. Maintain confidentiality, except for legal obligations to report fraud and malfeasance.

Management Assertions MANAGEMENT is responsible for the accuracy and reliability of the financial statements. The Sarbanes-Oxley Act of 2002 is very clear and unambiguous. Management must design, implement, operate, maintain, and monitor an Internal Control System.

Review Basic Information Ideas Accuracy Precision Timeliness Relevancy Validity Completeness Occurrence Integrity RELIABILITY PREVENT DETECT CORRECT

Management Assertions MANAGEMENT is responsible for the accuracy and reliability of the financial statements. Management must also periodically test the Internal Control System, and report the results of those tests in the Annual Report Management must design, implement, operate, maintain, monitor, an Internal Control System.

Function of Control Activities Preventive controls Detective controls Corrective controls

DEFINITION OF INTERNAL CONTROL   Internal control is broadly defined as a process, effected by an entity's Board of Directors, Management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations. Reliability of financial reporting. Compliance with applicable laws and regulations. (From the 2013 Update of the COSO 1992 Internal Control Integrated Framework)

Objectives of the Internal Control System Promote accuracy and reliability of accounting records, info, and statements Promote efficiency and effectiveness of the organization’s operations Measure compliance with laws, regulations, management policies and procedures

Components of the Internal Control System Control Environment Risk Assessment Control Activities Communication and Information Monitoring COSO Integrated Framework of Internal Control, 2013

COSO Cube

Common Control Activities Using Documents and Records Pre-numbered Documents and check-off lists Segregation of Duties, Checks and Balances Written policies and procedures Authorizations and Chain of Command, Responsibility Background checks, drug tests, employment policies Employee Training Programs Performance Evaluations, feedback, quick accountability Bonding of Employees Mandatory vacations Employee Termination procedures Mandatory Use of Technology Physical Security

Enterprise Risk Management COSO ERM Framework Enterprise Risk Management Internal Control GOVERNANCE BODIES BOARDS OF DIRECTORS RISK CONTROL OFFICERS MANAGEMENT ACCOUNTANTS AUDITORS

Questions about internal control?

Cash Cash Receipts (money coming in) Cash Disbursements (money going out)

Cash Cash Receipts (money coming in) Remittance Advice Checks

Cash Cash Receipts (money coming in) Remittance Advice Checks $7,238

Cash Cash Receipts (money coming in) Remittance Checks Advice Deposit Slip Endorsement

Cash Cash Receipts (money coming in) Checks Deposit Slip

Cash Cash Receipts (money coming in) Deposit Receipt

Cash Cash Receipts (money coming in)

Cash Cash Receipts (money coming in) Cash Disbursements (money going out) Signature Card

Cash Cash Receipts (money coming in) Cash Disbursements (money going out)

BANK RECONCILIATION Cash Cash Receipts (money coming in) Cash Disbursements (money going out) BANK RECONCILIATION

Actual Cash Balance BANK RECONCILIATION

Actual Cash Balance TO ADJUST THE BANK BALANCE SUBTRACT Outstanding Checks ADD Deposits in Transit 5834 -145 – 850 + 2050 = $6889 Outstanding Checks Deposits-in-Transit

Actual Cash Balance TO ADJUST THE BOOK BALANCE ADD Interest Earned SUBTRACT Service Charges SUBTRACT Returned Items Actual Cash Balance TO ADJUST THE BANK BALANCE SUBTRACT Outstanding Checks ADD Deposits in Transit 5834 -145 – 850 + 2050 = $6889 7328 + 16 – 20 – 435 = $6889

Actual Cash Balance TO ADJUST THE BOOK BALANCE ADD Interest Earned SUBTRACT Service Charges SUBTRACT Returned Items Actual Cash Balance TO ADJUST THE BANK BALANCE SUBTRACT Outstanding Checks ADD Deposits in Transit 5834 -145 – 850 + 2050 = $6889 7328 + 16 – 20 – 435 = $6889

Actual Cash Balance TO ADJUST THE BOOK BALANCE ADD Interest Earned SUBTRACT Service Charges SUBTRACT Returned Items Actual Cash Balance 7328 + 16 – 20 – 435 = $6889

Actual Cash Balance TO ADJUST THE BOOK BALANCE ADD Interest Earned SUBTRACT Service Charges SUBTRACT Returned Items Actual Cash Balance 7328 + 16 – 435 - 20 = $6889

Questions?

Summary Internal Control Controls on cash Sarbanes-Oxley Act Three functions of internal control activities (prevent, detect, correct) Five components of the Internal Control System Three objectives of the Internal Control System Examples of Internal Control Activities Controls on cash Segregation of duties Documentation Bank Reconciliation Adjust the bank balance (by subtracting outstanding checks and adding Deposits-in-Transit) Adjust the book balance (by making adjusting entries to record Interest Earned, Bank Fees, and NFS items) Compare the adjusted balances and investigate differences.

CASH $700 $700 $20 $16 $400 $400 $16 $20 Payable to David Fordham Interest Expense Service Revenue $16 $20

Payable to David Fordham $700 $20 $16 $400

Questions? Don’t forget Homework 11