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

Part I Internal Control

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

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

Internal Control Control Environment Accounting System Internal Control Procedures

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

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

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

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

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

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

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

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

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

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

Part II Cash and Cash Equivalents

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

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

Part III Cash Management and internal control over cash

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

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

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

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.

Part V Petty Cash ( Used for small disbursements)

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

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

Accounting for Petty Cash *$ – ($ ) = $ – $ = $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