1. Reporting and Analyzing Cash and Internal Controls
Chapter 6
Reporting and Analyzing Cash and Internal Controls
Financial Accounting John J. Wild – Fifth Edition
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Purpose and Principles of Internal Control
Establish responsibilities.
Maintain adequate records.
Insure assets and bond key employees.
Separate recordkeeping from custody of assets.
Divide responsibility for related transactions.
Apply technological controls.
Perform regular and independent reviews.
Purpose of Internal Control
Managers use policies and procedures to:
Protect assets.
Ensure reliable accounting.
Promote efficient operations.
Urge adherence to company policies.
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3. The Sarbanes-Oxley Act
The Sarbanes-Oxley Act, also known as SOX, requires management and auditors of publicly held companies to adhere to or perform specific requirements, such as:
Evaluation of internal controls.
Auditor’s work is overseen by the Public Company Accounting Oversight Board (PCAOB).
Restriction on consulting services performed by auditors.
Term limits on person leading the audit.
Harsh penalties for violators, including prison time with severe fines.
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4. Technology and Internal Control
Reduced
Processing
Errors
More
Extensive Testing
of Records
Crucial
Separation of
Duties
Limited
Evidence of
Processing
Increased
E-commerce
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5. Limitations of Internal Control
Human Error
Negligence
Fatigue
Misjudgment
Confusion
Human Fraud
Intent to
defeat internal
controls for
personal gain
The costs of internal controls must not exceed their benefits.
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6. Control of Cash C1
An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines:
Handling cash is separate from recordkeeping of cash.
Cash receipts are promptly deposited in a bank.
Cash disbursements are made by check.
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7. Control of Cash Receipts and Cash Disbursements
Over-the-Counter Cash Receipts
Cash register with locked-in record of transactions.
Compare cash register record with cash reported.
Cash Receipts By Mail
Two people open the mail.
Money to cashier’s office.
List to accounting dept.
Copy of list filed.
All expenditures should be made by check. The only exception is for small payments from petty cash.
Separate authorization for check signing and recordkeeping duties.
Use a voucher system.
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8. Operating a Petty Cash Fund
Company Cashier
Petty Cashier
Accountant
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9. Operating a Petty Cash Fund
Petty Cashier
Petty Cash
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10. Operating a Petty Cash Fund
A petty cash fund is used only for business expenses.
Petty Cashier
Courier
$80
39¢
Stamps
$45
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11. Operating a Petty Cash Fund
Petty cash receipts with either no signature or a forged signature usually indicate misuse of petty cash.
Receipts
Petty Cashier
Courier
$80
39¢
Stamps
$45
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12. Operating a Petty Cash Fund
Receipts
$125
To reimburse
petty cash fund
Company Cashier
Petty Cashier
Use a Cash
Over and Short
account if needed.
Accountant
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13. Banking Activities as Controls
Bank Accounts
Signature Cards
Deposit Tickets
Checks
Electronic Funds Transfer
Bank Statements
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14. Bank Reconciliation P3
A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on company’s books.
Why are the
balances different? *
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15. Bank Statement Balance
Reconciling Items P3
Book Balance
Add: Collections made by the bank.
Add: Interest earned on checking account.
Deduct: Nonsufficient funds check (NSF).
Deduct: Bank service charge.
Add or Deduct: Book errors.
Bank Statement Balance
Add:
Deposits in transit.
Deduct: Outstanding Checks
Add or Deduct: Bank errors.
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16. Bank Reconciliation Example
Only amounts shown on the book portion of the reconciliation require an adjusting entry.
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17. Days’ Sales Uncollected
How much time is likely to pass before
we receive cash receipts from credit sales?
Days’
sales
uncollected
Accounts receivable
Net sales
× 365 =
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18. End of Chapter 6
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