1. Sarbanes-Oxley, Internal Control & Cash
ACG 2021: Chapter 7

2. Sarbanes-Oxley Act of 2002
This act is considered one of the most important and significant laws affecting publicly held companies in recent history.
Publicly held companies –are those traded on public exchanges
Purpose is to restore public confidence and trust in the financial statements of companies.
Emphasizes the importance of internal control.
Internal Control – as the procedures and processes used by a company to safeguard its assets, process information accurately, and ensure compliance with laws and regulations.
Requires companies to maintain strong and effective internal controls over the recording of transactions and preparation of financial statements.
To deter fraud and prevent misleading financial statements.
Requires companies and their independent accountants to report on the effectiveness of the company’s internal controls

3. Sarbanes Oxley
Caused by
Enron
Worldcom
Tyco

4. Internal Controls are the policies and procedures that:
protect assets from misuse,
ensure that business information is accurate,
ensure that laws and regulations are being followed

5. Objectives of Internal Controls
Provides reasonable assurance that
Assets are safeguarded and used for business purposes
Business information is accurate
Employees comply with laws and regulations

6. Elements Control environment Risk assessment Control procedures
Monitoring
Information and communication

7. Control procedures Competent personnel Rotating duties
Mandatory vacations
Separating responsibilities
Separating operations
Proof and security measures

8. Cash Controls over Receipts and Payments
Cash – includes coins, currency, checks, money orders, and money on deposit
Businesses may have more than one cash account.
Operating account
Payroll account
Savings account

9. Control of Cash Receipts
To protect cash from theft and misuse, a business must control cash from the time it is received until it is deposited in a bank.
Two main sources of cash:
Customers purchasing products or services
Customers making payments on account

10. Cash Received from Cash Sales:
Regardless of the source of cash receipts, every business must properly safeguard and record its cash receipts.
Cash registers help minimize risk
Change fund – amount in each drawer at the beginning of a shift.

11. Cash in Register Cash register
Change fund: monies at the start of the shift
At the end of the day, monies in the register may not equal what is should be
Short – too little – an expense to the business
Over – too much – revenue to the business

12. Recording of Difference
Cash short and over
New account
Classification depends on balance
Short => Debit = expense
Over => Credit = revenue

13. Cash Short and Over
Example: Cash sales show $2,000 and cash in drawer is $2,005.
Date
Account PR
Debit
Credit
Cash
$2,005
Cash short and over 5
Sales
2,000

14. Cash short and Over
Example 2:: Suppose that cash sales are $3,500 and cash in drawer is $3,400.

15. Cash short and Over Cash short & Over Debit Short Results in expense
Credit
Over
Results in revenue

16. Cash Control over Receipts
Cash Received by Mail:
Lock box
Cash controls
Cash Received by EFT:
EFT – electronic funds transfers
Most companies encourage automatic electronic transfers by customers
Term used in the auditor’s opinion of the internal control environment
Less costly
Enhance internal controls

17. Control of Cash Payments
Control of cash payments should provide reasonable assurance that payments are made for only authorized transactions.
Voucher system
Set of procedures for authorizing and recording liabilities to pay cash or issue an electronic funds transfer.
Cash paid by EFT
Payroll systems

18. Bank Accounts and Bank Reconciliation
Bank accounts are used for control purposes
Reduces the amount of cash on hand at any one time
Provide independent recording of cash transactions
Facilitates the transfer of funds
Terminology:
Bank statement – a summary of transactions
Credit – increase in bank balance
ACH: automated clearing house entry for EFT
MS – miscellaneous credit
Debit – decrease in bank balance
NSF – not sufficient funds check
SC – service charge

19. Bank Reconciliation
The reasons for the difference between the cash balance on the bank statement and the cash balance in the accounting records should be analyzed by preparing a bank reconciliation.
It is an analysis of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger in order to determine the adjusted cash balance.

20. Bank Reconciliation Steps in Bank Reconciliation:
Compare deposits on the bank statements with the ledger
Compare checks on the bank statements with the ledger
Add credit memo that have not been recorded to the balance according to the company’s records.
Deduct debit memo that have not been recorded form the balance according to the company’s records.
List any errors discovered during the preceding steps.

21. Bank’s records Company’s records
7-5
Bank’s records
Company’s records
Beginning balance $3,359.78
Beginning balance $2,549.99
Add deposit not
recorded by bank
Add note and interest
collected by bank
$4,175.98
$2,957.99
Deduct outstanding
checks:
No. 812 $1,061.00 No
No ,544.99
Deduct check
NSF $300.00
Bank service
charges 18.00
Error recording
Check No
327.00
Adjusted balance $2,630.99
Adjusted balance $2,630.99 51

22. 7-5
Bank Reconciliation for Power Networking 52

23. 7-5 Entry to Record Plus Items July 31 Cash 408 00
Entry to Record Plus Items
7-5
July 31 Cash
Notes Receivable
Interest Income 8 00
Note collected by bank. 55

24. 7-5 Entry to Record Minus Items July 31 Cash 408 00
Entry to Record Minus Items
7-5
July 31 Cash
Note collected by bank.
Notes Receivable
Interest Income 8 00
31 Accounts Receivable—Thomas Ivey
Miscellaneous Expense
Accounts Payable—Taylor Co
Cash
NSF check, bank service charges, and error in recording Check no. 879. 57

25. Example Deposit on July 31 not recorded on bank statement $816.20
Checks outstanding No 12 $1,061.00, No 8 $435.39, No 3 $48.60
Note plus interest of $8 collected by the bank $408.00
Check from customers return by bank because of insufficient funds $300.00
Bank service charge $18
Check No 23 recorded as $ when it was actually $
Bank balance on statement $
Book balance per general ledger $
Do a bank reconciliation and prepare entries.

26. Petty Cash Fund for small cash expenses Petty Cash is an asset account
Supplies
Postage
Food
Parking
Petty Cash is an asset account

27. Petty Cash Entries
Establish the fund: Check written to petty cash for $500.
Date
Account PR
Debit
Credit
Petty cash
500
Cash

28. Petty Cash Entries Reimburse the account
Example 1: Suppose that petty cash fund as the following receipts: office supplies $200, Miscellaneous $100, reimburse the account.
Date
Account PR
Debit
Credit
Office supplies
200
Miscellaneous expense
100
Cash
300