INTERNAL CONTROL AND CASH Accounting Principles, Eighth Edition CHAPTER 8 INTERNAL CONTROL AND CASH Accounting Principles, Eighth Edition

Mechanical and Electronic Internal Control Principles of Internal Control Illustration 8-3 PHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS Physical Mechanical and Electronic LO 2 Identify the principles of internal control.

Principles of Internal Control INDEPENDENT INTERNAL VERIFICATION Records periodically verified by an employee who is independent. Discrepancies reported to management. OTHER CONTROLS Bond employees. Rotate employees’ duties and require vacations.

Limitations of Internal Control Costs should not exceed benefit. Human element. Size of the business. LO 2 Identify the principles of internal control.

Internal Control over Cash Receipts Cash Controls Internal Control over Cash Receipts Establishment of Responsibility Only designated personnel are authorized to handle cash receipts (cashiers) Documentation Procedures Use remittance advice (mail receipts), cash register tapes, and deposit slips Independent Internal Verification Supervisors count cash receipts daily; treasurer compares total receipts to bank deposits daily Segregation of Duties Different individuals receive cash, record cash receipts, and hold the cash Physical, Mechanical, and Electronic Controls Store cash in safes and bank vaults; limit access to storage areas; use cash registers Other Controls Bond personnel who handle cash; require employees to take vacations; deposit all cash in bank daily Illustration 8-5 LO 3 Explain the applications of internal control principles to cash receipts.

Cash Controls Cash consists of coins, currency, checks, money orders, and money on hand or on deposit in a bank. Cash receipts come from: cash sales collections on account from customers receipt of interest, rent, and dividends investments by owners bank loans proceeds from the sale of noncurrent assets LO 3 Explain the applications of internal control principles to cash receipts.

Over-the-Counter Receipts Cashier’s Department Over-the-Counter Receipts Sales Department Illustration 8-7 Prepare daily summary Prepare deposit slip Cashier ring up sales Supervisor reads register totals makes cash counts prepares cash count sheets Bank (deposit) Treasurer (verification) Accounting (record) See page 347 & 348

Review Question Cash Controls Permitting only designated personnel to handle cash receipts is an application of the principle of: a. segregation of duties. b. establishment of responsibility. c. independent check. d. other controls. LO 3 Explain the applications of internal control principles to cash receipts.

Internal Control over Cash Disbursements Cash Controls Internal Control over Cash Disbursements Generally, internal control over cash disbursements is more effective when companies pay by check, rather than by cash. Applications: Voucher system Electronic funds transfers (EFT) system Petty cash fund LO 4 Explain the applications of internal control principles to cash disbursements.

Internal Control over Cash Disbursements Cash Controls Internal Control over Cash Disbursements Establishment of Responsibility Only designated personnel are authorized to sign checks (treasurer) Documentation Procedures Use prenumbered checks and account for them in sequence; each check must have an approved invoice Independent Internal Verification Compare checks to invoices; reconcile bank statement monthly Physical, Mechanical, and Electronic Controls Store blank checks in safes, with limited access; print check amounts by machine in indelible ink Segregation of Duties Different individuals approve and make payments; check signers do not record disbursements Other Controls Stamp invoices PAID Illustration 8-8 See illustration 8-8 page 350

Review Question Cash Controls The use of prenumbered checks in disbursing cash is an application of the principle of: a. establishment of responsibility. b. segregation of duties. c. physical, mechanical, and electronic controls. d. documentation procedures. LO 4 Explain the applications of internal control principles to cash disbursements.

Internal Control over Cash Disbursements Cash Controls Internal Control over Cash Disbursements Voucher System Network of approvals, by authorized individuals, to ensure all disbursements by check are proper. A voucher is an authorization form prepared for each expenditure. LO 4 Explain the applications of internal control principles to cash disbursements.

Internal Control over Cash Disbursements Cash Controls Internal Control over Cash Disbursements Electronic Funds Transfers (EFT) Disbursement systems that uses wire, telephone, or computers to transfer cash balances between locations. LO 4 Explain the applications of internal control principles to cash disbursements.

Internal Control over Cash Disbursements Cash Controls Internal Control over Cash Disbursements Petty Cash Fund - Used to pay small amounts. Involves: establishing the fund, making payments from the fund, and replenishing the fund. LO 5 Describe the operation of a petty cash fund.