1. 1 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

2. Internal Control and Cash Chapter 4 2 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

3. Describe fraud and its impact 3 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

4. Fraud Intentional misrepresentation of facts Causes injury or damage to another party Large problem that increases each year 4 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

5. Types of Fraud Misappropriation of assets Employees steal assets from company Cash Inventory False expense reports Fraudulent financial reporting Managers make false entries so company appears more profitable Deceives investors and creditors 5 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

6. Fraud Triangle 6 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

7. Explain the objectives and components of internal control 11 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

8. Internal Control Primary way fraud and errors are: ▫Prevented ▫Detected or ▫Corrected Management and Board of Directors implements a: ▫Plan of organization ▫System of procedures 8 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

9. Objectives of Internal Control Safeguard assets Encourage employees to follow policy Promote operational efficiency Ensure accurate, reliable records Comply with legal requirements 9 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

10. Sarbanes-Oxley Act (SOX) Federal law requiring public companies to have system of internal controls ▫Auditors examine controls and issue reports on reliability Provisions: ▫Require internal control report by companies ▫Create Public Company Accounting Oversight Board ▫Limit non-audit services of auditing firms ▫Penalize violators 10 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

11. Shield of Internal Control Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 11 Internal Controls

12. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 12 Components of Internal Control Control Procedures Monitoring Information System Control Environment Risk Assessment

13. Control Environment Tone at the top Key ingredient Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 13

14. Risk Assessment Identify business risks Establish procedures to deal with risks 14 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

15. Information System and Control Procedures Information System ▫How accounting information enters and exits company ▫System must capture, process and report transactions accurately Control procedures ▫Built in control environment and information system ▫How companies meet five objectives of internal control 15 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

16. Monitoring Controls Prohibit one employee from process transaction completely Program controls into computerized system Hired auditors to monitor controls ▫Internal – monitor from the inside to safeguard assets ▫External – test from the outside to ensure accounting records are accurate 16 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

17. Internal Control Procedures Smart Hiring Practices Separation of Duties ▫Asset handling ▫Record keeping ▫Transaction approval Comparison and Compliance Monitoring ▫Operating and cash budgets ▫Audits ▫Manual or computer checks 17 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

18. Internal Control Procedures Adequate Records ▫Hard copy or electronic Limited Access ▫Assets by custodians ▫Records by accounting department Proper Approvals ▫The larger the transaction, the more specific approval 18 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

19. SCALP Smart hiring practices and segregation of duties Comparisons and compliance monitoring Adequate records Limited access Proper approvals 19 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

20. Information Technology (IT) Accounting systems rely on more than ever before Examples: ▫Inventory sensors ▫Barcode scanning Basic attributes of internal control do not change ▫Procedures to implement are different Use of computers can greatly improve speed and accuracy 20 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

21. Safeguard Controls Fireproof vaults Security cameras Fidelity bonds Mandatory vacations Loss prevention specialists 21 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

22. Internal Controls for E-Commerce Pitfalls of e-commerce ▫Stolen credit card numbers ▫Computer viruses and Trojan Horses ▫Phishing expeditions Security measures ▫Encryption ▫Firewalls 22 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

23. Costs and Benefits of Internal Control Ways good internal control can be circumvented ▫Collusion ▫Management override ▫Fatigue & negligence The stricter the internal control, the more it costs ▫The benefits should outweigh the costs 23 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

24. Bank Account as Control Device Signature card Bank statement Deposit ticket Bank reconciliation Check 24 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

25. Design and use a bank reconciliation 25 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

26. Bank Account Documents Signature card Deposit ticket Check ▫Maker ▫Payee ▫Bank 26 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

27. The Bank Statement Reports: ▫Cash receipts ▫Cash payments Electronic Funds Transfer (EFT) ▫Make payments by electronic communication 27 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

28. Bank Reconciliation Two records of a business’s cash Amounts are usually different ▫Time lags in recording transactions Bank reconciliation explains differences 28 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

29. Bank Side of the Reconciliation Deposits in transit Outstanding checks Bank errors 29 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

30. Book Side of the Reconciliation Bank collections Electronic Funds Transfers (EFT) Service charges Interest revenue NSF checks Cost of printed checks Book errors 30 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

31. Exercise 4-21A Bank:Books: Balance, November 30 Add: Less: 31 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

32. Summary of Reconciling Items BANK BALANCE - ALWAYSBOOK BALANCE - ALWAYS Add deposits in transitAdd bank collections, interest revenue and EFT receipts Subtract outstanding checksSubtract services charges, NSF checks, EFT payments Add or subtract correction of bank errors Add or subtract correction of book errors 32 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

33. Journalizing Bank Reconciliation Items All items on the book side of the bank reconciliation require journal entries If the item is added to book side If the items is subtracted from the book side 33 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

34. 34 JOURNAL DateAccounts and explanationDebitCredit Cash Interest revenue To record interest earned on the bank statement Cash Accounts receivable Account receivable collected by bank Miscellaneous expense Cash Bank service charges NSF check returned by bank

35. Evaluate internal controls over cash receipts and cash payments 35 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

36. Internal Control over Cash Receipts Cash is easy to steal All transactions ultimately affect cash Cash receipts should be deposited quickly Companies can receive cash ▫Over the counter ▫Through the mail 36 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

37. Cash Receipts over the Counter Point-of-sale terminals provide control over cash receipts ▫Also record sale, cost of item sold and reduction to inventory Customer issued a receipt as proof of purchase Sales associate turns in cash drawer at end of shift ▫Combined with other cash and deposited Accounting department reconciles sales per terminal to cash in drawer 37 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

38. Cash Receipts by Mail Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 38 Mailroom Accounting Department Treasurer Bank Controller

39. Controls Over Payments by Check Payment by check or EFT payment is an internal control ▫Provides record of the payment ▫Check must be signed by an authorized official ▫EFT must be approved by an authorized official ▫Should be supported by evidence payment Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 39

40. Cash Payments by Check Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. Receiving Report Invoice Inventory Purchase Order Check Company A Company X 1 4 3 2 2 40

41. Internal Control for Purchasing Segregate the following duties: Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 41

42. Payment Packet Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 42

43. Petty Cash Small fund to make minor purchases One employee is responsible for the accounting ▫Custodian Set amount of cash Voucher prepared for each payment Sum of fund plus paid voucher should equal set amount ▫Imprest system Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 43

44. Construct and use a cash budget 44 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

45. Budgeting Budget ▫Financial plan to coordinate activities Cash budget ▫Planning receipts and payments Steps: ▫Start with beginning cash balance ▫Add budgeted receipts ▫Subtract budget payments ▫Equals expected cash balance 45 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

46. Expected Cash Balance Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 46 If expected cash is greater than minimum needed If expected cash is less than minimum needed

47. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. Cash Budget Beginning cash balance Budgeted cash receipts: Collections from customers Dividends from investments Sale of plant and equipment Budgeted cash payments: Purchases of inventory Operating expenses Purchase of long-term assets Payment of dividends Payment of long-term debt Cash available (needed) Budgeted cash balance, end of period Cash available for investing or (new financing needed) 47

48. Exercise 4-25A 48 Cash Budget - Gale Communications Inc. Beginning cash balance Budgeted cash receipts: Collections from customers Sale of assets Budgeted cash payments: Cost of services and products Operating expense Purchase of new equipment Debt payments Cash dividends Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

49. Cash available Budgeted cash balance, end of period Cash available for investing Exercise 4-25A (continued)

50. Reporting Cash on the Balance Sheet All cash accounts combined into a single total ▫Cash & Cash Equivalents Cash equivalents include ▫Time deposits ▫Certificates of deposit ▫High grade government securities 50 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

51. Compensating Balances Cash balance should not include cash that is restricted in any way Company that borrows agrees to maintain a minimum cash balance ▫Compensating balance agreement 51 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

52. 52 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

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