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Study Objectives
1. Define internal control. 2. Identify the principles of internal control.
Internal Control
The SarbanesOxley Act Principles Limitations
Cash Controls
Control over cash receipts Control over cash disbursements
Use of a Bank
Reporting Cash
Cash equivalents Restricted cash Compensating balances
Making deposits Writing checks Bank statements Reconciling the bank account
Chapter 8-3
Internal Control
Methods and measures adopted to:
1. Safeguard assets.
2. Enhance accuracy and reliability of accounting records. Reduce risk of: a. Errors (unintentional) b. Irregularities (intentional)
Under the Sarbanes-Oxley Act, all publicly traded U.S. corporations are required to maintain an adequate system of internal control.
Chapter 8-4
Internal Control
Internal Control
Illustration 8-1
Chapter 8-6
Internal Control
Internal Control
Physical
Internal Control
OTHER CONTROLS
1. Bond employees. 2. Rotate employees duties and require vacations. 3. Conduct background checks.
Chapter 8-9
Internal Control
Human element.
Size of the business.
Chapter 8-10
Cash Controls
Discussion Question
Q8-8. The management of Sewell Company asks you, as the company accountant, to explain (a) the concept of reasonable assurance in internal control and (b) the importance of the human factor in internal control.
Cash Controls
Store cash in safes and bank vaults; limit access to storage areas; use cash registers
Chapter 8-12
Cash Controls
Discussion Question
Q8-3. At the corner grocery store, all sales clerks make change out of one cash register drawer. Is this a violation of internal control? Why?
Cash Controls
Cash consists of coins, currency, checks, money orders, and money on hand or on deposit in a bank. Cash receipts come from: cash sales
bank loans
proceeds from the sale of noncurrent assets
Chapter 8-14
Over-the-Counter Receipts
Sales Department
Illustration 8-7
Cashiers Department
(deposit)
Bank
(verification)
Treasurer Accounting
(record)
Mail Receipts
Control Procedures:
Mail receipts should be opened by two people, a list prepared, and each check endorsed.
Copy of the list, along with the checks and remittance advices, sent to cashiers department. Cashier adds the checks to the over-the-counter receipts and prepares a daily cash summary and makes the daily bank deposit.
Copy of list sent to treasurers office for comparison with total shown on daily cash summary.
Chapter 8-16
Cash Controls
Review Question
Permitting only designated personnel to handle cash receipts
is an application of the principle of:
a. segregation of duties.
b. establishment of responsibility. c. independent check. d. other controls.
Chapter 8-17
Cash Controls
Voucher system
Electronic funds transfers (EFT) system Petty cash fund
Chapter 8-18
Cash Controls
Documentation Procedures Use prenumbered checks and account for them in sequence; each check must have an approved invoice
Other Controls Stamp invoices PAID
Independent Internal Verification Compare checks to invoices; reconcile bank statement monthly
Physical, Mechanical, and Electronic Controls Store blank checks in safes, with limited access; print check amounts by machine in indelible ink
Chapter 8-19
Cash Controls
Discussion Question
Q8-14. Joe Griswold Companys internal controls over cash disbursements provide for the treasurer to sign checks imprinted by a checkwriting machine in indelible ink after comparing the check with the approved invoice. Identify the internal control principles that are present in these controls.
See notes page for discussion
Chapter 8-20
Cash Controls
Review Question
The use of prenumbered checks in disbursing cash is an application of the principle of:
a. establishment of responsibility.
b. segregation of duties.
c. physical, mechanical, and electronic controls. d. documentation procedures.
Chapter 8-21
Cash Controls
Chapter 8-22
Cash Controls
Chapter 8-23
Cash Controls
Chapter 8-24
Cash Controls
E8-8 Lincolnville Company uses an imprest petty cash system. The fund was established on March 1 with a balance of $100. During March the following petty cash receipts were found in the petty cash box. Receipt
Date 3/5 7 9 11 14 No. 1 2 3 4 5 For Stamp inventory Freight-out Miscellaneous expense Travel expense Miscellaneous expense Amount $ 39 21 6 24 5
The fund was replenished on March 15 when the fund contained $3 in cash. On March 20, the amount in the fund was increased to $150. Instructions: Journalize the entries in March that pertain to the operation of the petty cash fund.
Chapter 8-25
Cash Controls
E8-8 The fund was established on March 1 with a balance of $100 March 1 Petty cash Cash 100 100
Chapter 8-26
Cash Controls
E8-8 The fund was replenished on March 15 when the fund contained $3 in cash. March 15 Postage expense Freight-out Miscellaneous expense Travel expense 39 21 11 24
2
97
Chapter 8-27
Cash Controls
E8-8 On March 20, the amount in the fund was increased to $150. March 20 Petty cash Cash 50 50
Chapter 8-28
Use of a Bank
Contributes to good internal control over cash.
Minimizes the amount of currency on hand.
Creates a double record of bank transactions. Bank reconciliation.
Chapter 8-29
Use of a Bank
Making Bank Deposits
Authorized employee should make deposit.
Illustration 8-10
Front Side
Chapter 8-30
Reverse Side
LO 6 Indicate the control features of a bank account.
Use of a Bank
Writing Checks
Illustration 8-11
Written order signed by depositor directing bank to pay a specified sum of money to a designated recipient.
Maker Payee Payer
Chapter 8-31
Use of a Bank
Bank Statements
Debit Memorandum
Bank service charge NSF (not sufficient funds)
Illustration 8-12
Credit Memorandum
Collect notes receivable.
Interest earned.
Chapter 8-32
Use of a Bank
Review Question
The control features of a bank account do not include:
a. having bank auditors verify the correctness of the bank balance per books. b. minimizing the amount of cash that must be kept on hand. c. providing a double record of all bank transactions. d. safeguarding cash by using a bank as a depository.
Chapter 8-33
Use of a Bank
Reconciling the Bank Account
Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances.
Reconciling Items:
1. Deposits in transit.
2. Outstanding checks. 3. Errors. 4. Bank memoranda.
Chapter 8-34
Use of a Bank
Reconciliation Procedures
Illustration 8-13
+ Notes collected by bank NSF (bounced) checks Check printing or other service charges
+- Bank Errors
CORRECT BALANCE
LO 7 Prepare a bank reconciliation.
Use of a Bank
E8-11 The following information pertains to Family Video Company.
1.
2.
3. 4. 5.
6.
Instructions a) Prepare a bank reconciliation at July 31. b) Journalize the adjusting entries at July 31 on the books of Family Video Company.
Chapter 8-36
Use of a Bank
E8-11 a) Prepare a bank reconciliation at July 31.
Cash balance per bank statement
Add: Deposit in transit Less: Outstanding checks Adjusted cash balance per bank $7,288 1,500 (591) $8,172 $7,284 900 36 (28) (20) $8,172
LO 7 Prepare a bank reconciliation.
Use of a Bank
E8-11 b) Journalize the adjusting entries at July 31 on the books of Family Video Company. Dr. Cr. July 31 Cash 788 Bank charge expense 28 Miscellaneous expense Notes receivable 20 900
Interest revenue
Note: Adjusting journal entry includes only the adjustments to the cash balance per books.
Chapter 8-38
36
Use of a Bank
Review Question
The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is:
a. outstanding checks. b. deposit in transit. c. a bank error.
Chapter 8-39
Reporting Cash
Most liquid asset, listed first in current assets section of balance sheet.
Illustration 8-16
Cash equivalents
Restricted cash
Compensating balances
Chapter 8-40
Use of a Bank
Review Question
Which of the following statements correctly describes the reporting of cash?
a. Cash cannot be combined with cash equivalents.
Recording Process
Discussion Question
Q2-19. Jim Benes is confused about how accounting information flows through the accounting system. He believes the flow of information is as follows.
a. Debits and credits posted to the ledger.
Is Jim correct? If not, indicate to Jim the proper flow of the information. See notes page for discussion
Chapter 8-42
Copyright
Copyright 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Chapter 8-43