1. Sarbanes-Oxley, Internal Control, and Cash
Chapter 5

2. Learning Objectives
Describe the Sarbanes-Oxley Act and its impact on internal controls and financial reporting
Describe and illustrate the objectives and elements of internal control
Describe and illustrate the application of internal controls to cash
Describe the nature of a bank account and its use in controlling cash
(continued…)

3. Learning Objectives
Describe and illustrate the use of a bank reconciliation in controlling cash
Describe the accounting for special-purpose cash funds
Describe and illustrate the reporting of cash and cash equivalents in the financial statements
Financial Analysis: Describe and illustrate the ratio of cash to monthly cash expenses in assessing the ability of a company to continue operating

4. Learning Objective 1
Describe the Sarbanes-Oxley Act and its impact on internal controls and financial reporting

5. Sarbanes-Oxley Act

6. Learning Objective 2
Describe and illustrate the objectives and elements of internal control

7. Objectives of Internal Control
Safeguarded assets & used for business purposes
Ensure accurate information
Compliance with laws and regulations

8. Elements of Internal Control
Control Environment
Risk assessment
Control Procedures
Monitoring
Information & Communication

9. Control Environment Three factors influencing a company’s control
environment are:
Management’s philosophy and operating style – emphasizing internal control.
The company’s organizational structure – framework for planning and controlling operations.
The company’s personnel policies – hiring, training, evaluating, compensation & promotion of employees.

10. Risk Assessment Changes in customer requirements Identify risks
Competition
Regulatory changes
Economic changes
ASSESSMENT:
Identify risks
Analyze significance
Assess likelihood of risk
Take action to minimize

11. Control Procedures
One of the most important elements of internal control. It includes:
Competent personnel, rotating duties, and mandatory vacations
Separating responsibilities for related operations
Separating operations, custody of assets, and accounting
Proofs and security measures

12. Monitoring Locates weaknesses and improves controls.
Includes on-going efforts and separate evaluations
Exhibit 3 – pg. 181

13. Information and Communication
Used by management to:
guide operations
ensure compliance with reporting, legal and regulatory requirements
assess external events and conditions
report externally

14. Limitations of Internal Controls
Human Element
Cost/ Benefit Considerations
Human Element – human errors due to fatigue, carelessness, confusion, or misjudgment
Cost/Benefit – costs for internal control should not exceed benefits of internal controls (ex. retail stores search all customers to prevent theft – result in loss of customer sales; instead signs, cameras and security tags

15. Learning Objective 3
Describe and illustrate the application of internal controls to cash

16. The Nature of Cash Coins Currency (“commercial paper”) Checks
Money Orders
Money on Deposit
Money Market Funds

17. Cash Received from Sales

18. Cash Short/Over
Difference in the amount of cash on hand vs. amount of cash register sales
Result of error in making change for a customer or sale rung up incorrectly
Normal business operating activity
Cash Short – register sale is more than cash received
Operating expense = “Miscellaneous Expense” recorded as a negative
Cash Over – cash received is more than register sale
Operating income = “Other Income” – recorded as a positive

19. Cash Short/Over - Examples
1. Short or Over? How much?
Cash register totals from cash sales: $35,690
Cash “on hand” (counted) from sales: $35,668
Answer - $22.00 short
2. Short or Over? How much?
Cash register totals from cash sales: $66,876
Cash “on hand” from sales: $67,654
Answer - $778 over
Go to pg: – do E5-12 & E5-13,

20. Other forms of Cash Payments
Cash received by mail
Customers send payment with “remittance advice” – portion of invoice
Helps to control cash
Checks are stamped with “For Deposit Only” – deposit is made; transaction is recorded with customer acct and cash received
Cash received by EFT
EFT = electronic funds transfer
Enhances internal controls
Reduces late payments – faster processing
Less cost

21. Control of Cash Payments – voucher system
Invoice,
Purchase Order, and
Receiving Report
Computerized
voucher
Submitted for approval
Payment is made

22. Learning Objective 4
Describe the nature of a bank account and its use in controlling cash

23. Nature of a Bank Account
CASH
Acct. Pay

24. Banking Basics EC: error correction to correct bank error
Bank issued debit memos (DM):
Payments made by EFT
Service charges (SC)
Customer checks returned for insufficient funds
Corrections – due to bank error
Abbreviations:
EC: error correction to correct bank error
NSF: not sufficient funds check
SC: service charge
ACH: automated clearing house entry for EFT
MS: miscellaneous item

25. Learning Objective 5
Describe and illustrate the use of a bank reconciliation in controlling cash

26. Bank Reconciliation
Def. – analysis of the items and amounts that result in the cash balance reported in the bank statement differing from the balance of the cash account in the ledger.
2 sections:
Bank section – cash balance according to the bank
Company section – cash balance according to the company
Terms:
Cleared/cancelled checks or deposits – checks or deposits that have been paid/processed by the bank
Outstanding checks or deposits – checks or deposits that have been made by the company but NOT cleared by the bank

27. Bank Reconciliation – 2 sections
Must be
EQUAL

28. Steps in the Reconciliation Process

29. Learning Objective 6
Describe the accounting for special-purpose cash funds

30. Petty Cash / Special-Purpose Funds
Def. – a special asset account to take care for small cash amounts; such as: postage, office supplies, and minor repairs.
Open (establish) Petty Cash (check is written from Cash)
Debit + Petty Cash
Credit – Cash
Replenish Petty Cash – determination of what has been spent from petty cash. *usually replenished monthly
Add receipts from expenditures – debit Assets & Expenses
Credit Cash for the amount to add back into Petty Cash
Special-Purpose Funds – other cash funds for special needs; such as: payroll or travel. *Treated like Petty Cash

31. Special Purpose Cash Funds – Petty Cash
Petty cash fund of $500 is established on August 1.
Replenished the petty cash fund on August 31.
There is no adjustment to Petty Cash when the fund is replenished.

32. Learning Objective 7
Describe and illustrate the reporting of cash and cash equivalents in the financial statements

33. Financial Statement Reporting of Cash
Cash Equivalent – high liquid investments purchased by a company to earn interest. Ex. U.S. Treasury bills, money market funds, etc. Purchased if a company has an excess of cash.

34. Learning Objective 8
Financial Analysis: Describe and illustrate the ratio of cash to monthly cash expenses in assessing the ability of a company to continue operating

35. Ratio of Cash to Monthly Cash Expenses
Assesses the ability of a company to continue to operate when the company reports negative net cash flows from operations
Ratio of Cash to Monthly Cash Expenses
_Cash & Cash Equivalents =
Monthly Cash Expenses
Net Cash Flows from Operations
Monthly Cash Expenses = 12

36. Ratio of Cash to Monthly Cash Expenses
Year 2
Year 1
Net cash flows from operating activities
$(29,062)
$(52,537)
End of the year cash and cash equivalents
48,344
37,304
Calculate:
Monthly cash expenses:
Year 2
Year 1
Ratio of cash to monthly cash expenses: