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Accounting for Cash and Internal Controls

internal control system

managers use an internal control system to monitor and control business activities

internal control systems are used for

1. protect assets
2. ensure reliable accounting
3. promote efficient operations
4. urge adherence to company policies

sarbanes-oxley act (sox)

requires managers and auditors of publicly traded companies to document and certify the system of internal controls

sox has impacted companies because

the cost of its implementation are high
average $4 Million per company

section 404 of sox

requires that managers document and assess the effectiveness of all internal control processes that can impact financial reporting.

Principles of Internal Control

1. establish responsibilities
2. maintain adequate records
3. insure assets and bond key employees
4. separate record keeping from custody of assets
5. divide responsibility for related transactions
6. apply technological controls
7. perform regular and independent reviews

COSO

committee of sponsoring organizations - provides a frame work for how these seven principles improve the quality of financial reporting

1. establish responsibilities

responsibility for a task is clearly established and assigned to one person.

2. maintain adequate records

good record keeping is par of an internal control system

3.insure assets and bond key employees

adequate insurance against casualty and that employees handling large amounts of cash and easily transferable assets are bonded

4.separate record keeping from custody of assets

a person who controls or has access to an asset must not keep that asset's accounting records

5.divide responsibility for related transactions

divide responsibility for a transaction or related transactions between two or more individuals

6. apply technological controls

cash registers, check protectors, time clocks, and personal id scanners are examples of devices that can improve internal control

7. perform regular and independent reviews

regular reviews of internal control systems are needed to ensure that procedures are followed

technology and internal control

technology impacts an internal control in several ways.
the most obvious being quicker access to databases and information

technology advanced systems

1.reduce the number of errors in processing information
2.allow for more extensive testing of records
3.limited evidence of processing (many are done by a computer)
4.crucial separation of duties- technology often yields some consolidations. the person who programs the information system must not be the one who operates it.

increased e-commerce

technology has encourage the growth of e-commerce
which has risks.
1. credit card number theft
2. computer viruses
3. impersonation online

all internal control policies have limitation

1. human error
2. human fraud
3. cost - benefit principle: costs of internal controls not exceed their benefits

controlling cash

cash and cash equivalents are the most liquid of all assets. internal controls for them are
1. handling cash is separate from recordkeeping of cash
2. cash receipts are promptly deposited in a bank
3. cash disbursements are made by check

liquidity

refers to a company's ability to pay for its near term obligations

liquid assets

cash and similar assets

cash

currency and coin along with amounts on deposit in bank accounts

cash equivalents

are short term, highly liquid investment asset meeting two criteria
1. readily convertible to a known cash amount and
2. sufficiently close to their due date so their market value is not sensitive to interest rate changes.

one of the most common reasons companies fail

their inability to manage cash

goals of cash management

1. plan cash receipts to meet cash payments when due
2. keep a minimum level of cash necessary to operate

treasurer of a company is responsible for

cash management

principles for effective cash management

1. encourage collection of receivables from customers
2. delay payment of liabilities (the longer they wait to pay the more time they have to use the money
3. keep only necessary levels of assets
4. plan expenditures -money should be spent only when it is available
5. invest excess cash

control of cash receipts

cash recieved is properly recorded and deposited

over the counter cash receipts

should be recorded on a cash register at the time of sale.
1. the clerk that has access to cash should not have access to its locked record
2. the clerk should count the cash from the register at the end of a work period.
3. a third employee compares the total from the register to that of the register tape.

cash over and short

differences between the cash in a register and the records from the register. this is reported as part of misc. expenses if it has a credit balance

cash receipts by mail

two people should be present when opening cash receipts coming in by mail. a list of the receipts should contain the senders name, the amount and an explanation of why the money is sent. The first copy of this list should be sent to the cashier, the 2nd to the accounting area and a third copy is to be kept by the clerk opening the mail.

control of cash disbursements

most large thefts occur from payment of fictitious invoices. One key to controlling cash disbursements is to require all expenditures to be made by check. The only exception is petty cash.

voucher system of control

1.establishes procedures for verifying, approving, and recording obligations for eventual cash disbursements.
2. issuing checks for payment of verified, approved, and recorded obligations

a reliable voucher system follows standard procedure for every transaction

1. only approved depts. and individuals are authorized
2. limits are in place for the type of obligations that can be incurred.
3. procedures for purchasing, receiving, and paying for merchandise are divided among several depts.

voucher

an internal document or file used to accumulate info. to control cash disbursements and to ensure that a transaction is properly recorded.

voucher example

starts with a purchase requisition and ends with a check drawn against cash.

petty cash system of control

petty cash is cash used for small payments required for items such as postage, minor repairs and low cost supplies

operating a petty cash fund

a check is drawn by the company cashier for estimated funds needed for a short period.
this check is recorded with a debit to the petty cash account (an asset) and a credit to cash.
the check is cashed.
when a cash disbursement is made, the person receiving payment should sign a prenumbered petty cash receipt. The receipt is them placed in the petty cash box with the remaining cash. See page 259

Basic Bank Services

The bank account, deposit, and check

bank account

a record set up by a bank for a customer which permits the customer to deposit money and helps control withdrawals.

signature card

used to verify signatures on checks

deposit ticket

lists items such as currency, coins and checks deposited along with their dollar amounts

to withdraw money from an account the depositor can use a

check- a document signed by the depositor instructing the bank to pay a specified amount of money to a designated recipient

EFT

electronic funds transfer- banks transfer fund electronically. is very cost effective

bank statement

shows the activity on an account on a monthly basis
1. beginning of period balance
2. checks and other debits decreasing the account
3. deposits
4. end of period balance Page 262

bank reconciliation

a report explaining any differences between the checking account balance according to the depositors records and the balance reported on the bank statement.

purpose of bank reconciliation

we must reconcile the two balances and account for any differences

outstanding checks

are checks written or drawn by the depositor

deposits in transit

are deposits made and recoded by the depositor but not yet recorded on the bank statement

deductions for uncollected items and for services

a company deposits a check that is uncollectible called non-sufficient funds (NSF)

additions for collections and interest

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errors

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