1. Internal Control and Accounting for Cash Chapter Six McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Internal Controls Internal Controls (policies/procedures to provide assurance that enterprise objectives are accomplished) (1) Accounting controls designed to safeguard company assets and ensure reliable accounting records (2) Administrative controls for evaluating performance and assessing compliance with company policies and public laws 6-1

3. Key Features of Internal Control 1.Separation of Duties 2.Quality of Employees 3.Bonded Employees 4.Required Absences 5.Procedures Manual 6.Authority and Responsibility 7.Prenumbered Documents 8.Physical Control 9.Performance Evaluations 6-2

4. Limitations Internal controls can be circumvented by collusion among employees. Two or more employees working together can hide embezzlement by covering for each other. No system can completely prevent fraud. 6-3

5. Accounting for Cash Controlling Cash Cash receipts should be recorded immediately upon receipt and deposited intact daily. Cash payments should be made by prenumbered check. Up to date signature card should be maintained. A deposit ticket should be used for all deposits. A monthly bank reconciliation should be prepared by an independent party. 6-4

6. Reconciling the Bank Statement The bank reconciliation reports on the differences between the balance on the bank statement and the balance in the general ledger cash account. The reconciliation results in the true cash balance that will appear on the balance sheet. 6-5

7. Reconciling the Bank Statement If an error is found on the bank statement, an adjustment for it is made to the unadjusted bank balance to determine the true cash balance. An error made on our books requires an adjusting journal entry to correct. 6-6

8. Adjusting the Books Every reconciling item that appears on the unadjusted book balance section requires a journal entry to adjust the general ledger cash balance to the true cash balance. 6-7

9. Cash Short and Over When using a cash register, employees sometimes make mistakes in collecting cash or making change for customers. If the cash register does not reconcile by a small amount at the end of the day, we use an account called Cash Short and Over to force a balance. Assume a cash register was to have a balance of $500, but contained only $499 at the end of the day. 6-8

10. Using Petty Cash Funds A petty cash fund is used to make small expenditures that cannot wait for the formal check- writing process. The fund is operated on an imprest basis. This means that when the fund gets low on cash it is replenished. The petty cashier is always responsible for the cash in the fund. This is an excellent internal control. 6-9

11. Using Petty Cash Funds Establishing a $300 petty cash fund. Treasurer prepares a $300 check payable to the petty cashier. Petty cashier takes the check to the bank and gets $300 cash for the fund. 6-10

12. Using Petty Cash Funds Record expenses paid from the petty cash fund. Treasurer prepares a $216.00 check payable to the petty cashier. Petty cashier takes the check to the bank and gets $216.00 cash for the fund. The fund is now returned to its $300 balance. 6-11

13. The Financial Analyst How can a financial analyst know that a company really did follow GAAP? Certified Public Accountants 6-12

14. Materiality and Financial Audits Auditors do not guarantee that financial statements are absolutely correct—only that they are materially correct. Material Item An error, or other reporting problem, that would influence the decision of an average prudent investor. 6-13

15. Types of Audit Opinions UnqualifiedAdverse QualifiedDisclaimer 6-14

16. The Securities and Exchange Commission (SEC) The SEC is a government agency authorized to establish and enforce the accounting rules for public companies. Public companies, have to follow the reporting rules of the SEC as well as GAAP. 6-15

17. Sarbanes-Oxley Act (SOX) of 2002 Prior to 2002, the SEC left much of the regulation and oversight of independent audits to the AICPA. However, SOX established the PCAOB to enforce audit standards for SEC audits. 6-16

18. End of Chapter Six 6-17