L> thing 7 Financial accounting . University of san Mateo accounting 121 Rosemary Nurre . Course info Announcements Assignments Student information house Page chapter 7

Internal Control and Cash

Study Objectives

determine the principles of internal control. define the applications the internal regulate to cash receipts. define the applications that internal control to cash disbursements. Prepare a financial institution reconciliation. describe the report of cash. talk about the an easy principles that cash management. recognize the primary elements of a cash budget. (Appendix) define the procedure of a small cash fund.

Chapter rundown

Study objective 1 - identify the values of inner Control

Internal regulate consists of every one of the related methods and also measures adopted within a business to:

Safeguard assets from employee theft, robbery, and also unauthorized use. Enhance the accuracy and also reliability that its bookkeeping records by to reduce the danger of errors (unintentional mistakes) and irregularities (intentional mistakes and misrepresentations) in the audit process.

Sarbanes-Oxley action of 2002 (SOX) needs all publicly traded U.S. Corporations to keep an adequate system of interior controls. SOX imposes more responsibilities on this firm executives and boards of director to ensure that companies’ interior controls space reliable and effective

suppliers must build sound principles of control over gaue won reporting and also continually assess that the controls space working. Independent outside auditors need to attest to the level of inner controls.

To safeguard assets and also enhance the accuracy and reliability that its audit records, suppliers follow internal control principles. The complying with six internal manage principles apply to most enterprises :

1. Establishment of duty

vital characteristic that internal control is the assignment of duty to certain individuals. Regulate is most efficient when just one person is responsible for a given task. Developing responsibility contains the authorization and also approval that transactions.

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2.Segregation of Duties

distinction of duties is indispensable in a system of internal control. The rationale because that segregation that duties is the the occupational of one employee should, there is no a duplication that effort, carry out a reliable basis for assessing the job-related of one more employee.
There room two typical applications the this principle: The responsibility for related activities should be assigned to different individuals. The obligation for record keeping for an asset have to be different from the physics custody that the asset. Associated Activities: once one separation, personal, instance is responsible for every one of the connected activities, the potential for errors and also irregularities is increased. Related purchasing activities should be assigned to various individuals. Connected purchasing activities include bespeak merchandise, receiving goods, and also paying (or authorizing payment) for merchandise. Connected sales activities also need to be assigned to different individuals. Related sales activities include do a sale, shipping (or delivering) the goods to the customer, and also billing the customer. Record maintaining Separate from physics Custody The custodian of the legacy is not most likely to transform the assets to personal use if one employee maintains the record of the legacy that have to be ~ above hand and also a various employee has physical custody the the assets.

Try to recall a expedition to the bank. Go the teller receiving the money because that deposit take the money to bookkeeping and document the deposit? Why not?


When a cashier in ~ the grocery save ends a shift, does the cashier to walk out and let someone else occupational out the the very same cash drawer? What is the usual procedure?

Documentation Procedures– Documents administer evidence the transactions and also events have occurred. Papers should be prenumbered and also all documents should be accounted for. Source documents for accounting entries need to be promptly forwarded come the audit department to aid ensure timely recording of the transaction and also event.

Why are checks and also invoices sequentially numbered? What happens to voided checks?

3. Physical, Mechanical, and also Electronic Controls – physical controls relate primarily to the safeguarding of assets. Mechanical and electronic controls safeguard assets and enhance the accuracy and reliability that the audit records. Use of physical, mechanical, and electronic controls is essential. Instances of this controls include:

Safes, vaults, and also safety deposit boxes because that cash and also business papers. Locked warehouses and storage cabinets because that inventory and records. Computer facilities with pass an essential access or fingerprint or eyeball scans. Alarms to prevent break-ins. Tv monitors and also garment sensors come deter theft. Time clocks for recording time worked. Why do you receive a cash register receipt in ~ a fast food restaurant, a grocery store store, or a department store? Why do some stores write-up signs that say “If you perform not receive a receipt, we will certainly pay you $5”? What need to a movie theater perform with its Saturday night receipts?

4. Independent interior Verification

Independent interior verification involves the review, comparison, and also reconciliation of data prepared by employees. Verification should be do periodically or on a surprise basis. Verification have to be excellent by an employee independent of the personnel responsible because that the information. Discrepancies and also exceptions must be reported to a management level that can take ideal corrective action. In huge companies, independent inner verification is often assigned to interior auditors. Internal auditors space employees that the agency who advice on a consistent basis the efficiency of the company’s system of interior control. They periodically testimonial the tasks of departments and also individuals to recognize whether prescribed inner controls room being followed.

Would the cashier counting the money in the cash drawer in ~ the finish of the workday? would certainly the person writing the checks prepare the bank reconciliation? Why or why not?

5. Other Controls

Bonding of employee who manage cash. Rotating employees" duties and requiring employee to take vacations.

Insurance service providers bond employees of various other companies who manage cash. Bonding employee is much like having actually an insurance policy that will reimburse the company if one employee steals money.

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Limitations of interior Control

Internal control is design to carry out reasonable assurance that assets are correctly safeguarded and that the accountancy records room reliable. The ide of reasonable assurance rests on the premise the the costs of establishing manage procedures have to not exceed their meant benefit. The human element is a factor in every device of internal control. A good system can become ineffective together a result of employee fatigue, carelessness, or indifference. Occasionally two or an ext employees might work with each other in order to get about prescribed controls (collusion). Collusion can considerably impair the efficiency of a system of interior control due to the fact that it eliminates the defense anticipated from segregation of duties. The size of the service may impose constraints on inner control. A little company may find it daunting to apply the ethics of distinction of duties and independent interior verification. An important and inexpensive measure any business deserve to take to reduce employee theft and fraud is to conduct thorough lift checks. Two tips include: inspect to view whether job applicants actually graduated native the colleges they list. Never use the telephone numbers because that previous employers offered on the reference sheet; constantly look them up yourself.

Would you suppose a very little company to have as advanced a mechanism of internal manage as the of a much larger company? Why not? What are means in i beg your pardon a small company deserve to have effective internal regulate procedures?

Study Objective 2 - explain the Applications that Internal manage to Cash Receipts

Cash Controls simply as cash is the start of a company’s operating cycle, it is generally the beginning point because that a company’s mechanism of internal control. Cash is the asset many susceptible to improper diversion and also use. Since of the big volume the cash transactions, numerous errors may happen in executing and also recording cash transactions. Come safeguard cash and ensure the accuracy of the accountancy records because that cash, reliable internal regulate over cash is imperative. Cash consists of coins, money (paper money), checks, money orders, and also money top top hand or top top deposit in a financial institution or comparable depository. Cash receipts result from cash sales; collection on account from customers; the receipt of interest, rents, and dividends; investments by owners; bank loans; and proceeds indigenous the revenue of noncurrent assets. The following internal control principles defined earlier use to cash receipts transactions as shown: Establishment of responsibility - just designated personnel (cashiers) room authorized to manage cash receipts. Segregation the duties - various individuals obtain cash, record cash receipts, and also hold the cash. Documentation procedures - use remittance advice (mail receipts), cash register tapes, and deposit slips. Physical, mechanical, and electronic controls - save cash in safes and also bank vaults; limit access to storage areas; usage cash registers. Independent internal verification - Supervisors count cash receipts daily; treasurer compares total receipts to financial institution deposits daily. Other controls - shortcut personnel who manage cash; need vacations; deposit every cash in financial institution daily.

Study Objective 3 - define the Applications that Internal regulate to Cash Disbursements

Cash is disbursed to salary expenses and also liabilities or to purchase assets. Internal manage over cash disbursements is an ext effective when payments are made through check, quite than by cash, other than for incidental amounts that room paid out of small cash.

Why would certainly internal manage over cash disbursements be an ext effective as soon as payments are made by inspect rather than by cash?

Cash payments are usually made just after certain control procedures have been followed. The paid examine provides proof of payment. The principles of interior control apply to cash disbursements as follows: Establishment that responsibility - only designated personnel (treasurer) space authorized to authorize checks. Segregation of duties - various individuals approve and make payments; check signers perform not record disbursements. Documentation procedures - use prenumbered checks and account for them in sequence; each check must have actually approved invoice. Physical, mechanical, and electronic controls - Store empty checks in safes with limited access; print check amounts by device with indelible ink. Independent inner verification - to compare checks to invoices; reconcile bank statement monthly. Other controls - stamp invoices “PAID”. Electronic Funds carry (EFT) device A new approach arisen to transfer funds among parties without the use of record (deposit tickets, checks, etc.). The approach, referred to as electronic accumulation transfers (EFT), uses wire, telephone, telegraph, or computer to move cash indigenous one ar to another. Petty Cash Fund - A cash fund used come pay reasonably small amounts. Details on the procedure of a petty cash money is detailed in the appendix come this chapter. Why would a organization use a small cash fund? In what instances would the small cash money be used? Use that a financial institution Contributes substantially to good internal manage over cash. Minimizes the lot of money that have to be preserved on hand. Facilitates the regulate of cash because a dual record is maintained of all financial institution transactions - one through the business and also one by the bank.The legacy account Cash maintained by the agency is the “flip-side” the the bank’s liability account for that company. It need to be possible to reconcile these couchsurfingcook.com—make lock agree—at any type of time. Financial institution statements - each month the agency receives a bank statement showing its financial institution transactions and balances. Some transactions and balances displayed include: check paid and other debits that minimize the balance in the depositor"s account. Deposits and also other credits that boost the balance in the epositor"s account. The account balance after every day"s transactions. bank statements are ready from the bank’s perspective. Every deposit the bank receives is an increase in the bank’s legal responsibility (an couchsurfingcook.com payable) come the depositor. Every examine the bank funds or pays because that a depositor reduce the bank’s liability (an couchsurfingcook.com payable) to the depositor.

Study Objective 4 - Prepare a financial institution Reconciliation

The bank and the firm maintain independent records of the check account. The two balances are hardly ever the same because of:

Time lags the prevent among the next from recording the transaction in the same period. work elapse in between the time a examine is written and also dated and also the date it is payment by the bank. A day may pass between the time receipts are taped by the company and the time they are videotaped by the bank. A time lag may occur when the financial institution mails a debit or credit memo come the company. Errors by either party in record transactions. The incidence that errors counts on the performance of interior controls kept by the agency and the bank. Financial institution errors are infrequent. Reconciliation procedure - In reconciling the bank account, it is customary come reconcile the balance per books and also balance per financial institution to their ad justed (correct or true) cash balances. To obtain maximum benefit from a financial institution reconciliation, the reconciliation have to be prepared by an employee who has no other responsibilities concerned cash. The reconciliation schedule is separated into 2 sections - balance every bank and also balance every books. The following steps have to reveal all the reconciling items causing the difference in between the 2 balances: compare the individual deposits top top the bank statement with the store in transit native the preceding financial institution reconciliation and with the deposits per firm records or copies of duplicate deposit slips. Deposits taped by the depositor that have not been recorded by the financial institution represent deposits in transit and are added to the balance per bank. Compare the paid checks shown on the financial institution statement or the paid checks reverted with the financial institution statement with (a) checks outstanding from the preceding bank reconciliation and also (b) check issued by the agency as tape-recorded in the cash payments journal. Approve checks tape-recorded by the company that have not been paid by the bank represent outstanding checks that room deducted native the balance per bank. Note any errors uncovered in the foregoing steps and also list lock in the ideal section that the reconciliation schedule. All errors do by the depositor are reconciling items in identify the advertisement justed cash balance every books. In contrast, all errors make by the financial institution are reconciling item in identify the advertisement justed cash balance per bank. Trace bank memoranda to the depositor"s records. Any unrecorded memoranda should be provided in the suitable section the the reconciliation schedule.

An instance of preparing a financial institution reconciliation follows:

The April bank statement because that Laird firm indicates a balance top top April 30 that $15,907.45. On that day the balance the cash per publications is $11,589.45. Native the foregoing steps, the complying with reconciling items space determined:

1. Store in transit: April 30 deposit (received by bank on might 1) $2,201.40 2. Superior checks: No. 453, $3,000.00; No. 457, $1,401.30; No. 460, $1,502.70 3. Errors: examine No. 443 was properly written by Laird for $1,226.00 and also was appropriately paid by the bank, but recorded for $1,262.00 through Laird. 4. Bank memoranda:

a. Debit—NSF examine from J. R. Baron for $425.60. b. Debit—Printing company checks charge, $30. c. Credit—Collection of note receivable because that $1,000 plus interest earned, $50, less bank collection fee $15

The financial institution reconciliation is presented below:

Cash balance per bank statement..............$15,907.45

Add: deposits in transit ..................................2,201.40

Less: exceptional checks

No. 453 ........$3,000.00

No. 457 ............,401.30

No. 460......... 1,502.70 ..................5,904.00

ad justed cash balance per financial institution ..............$12,204.85

Cash balance per books ...........................$11,589.45

Less: bank service fee .........30.00 NSF inspect ................................425.60........... 425.60 changed cash balance per books .............$12,204.85

Entries from financial institution Reconciliation - each reconciling item supplied in identify ad justed cash balance per publications should be taped by the depositor. If these items are not journalized and posted, the Cash account will certainly not show the correct balance.

The procedure of making ad justing entries native the financial institution reconciliation utilizing the entries to advertisement just Laird Company’s cash account follows:

Apr. 30 .....Cash ....................................36 .............................couchsurfingcook.com Payable....................... 36 (To correct error in recording check No. 443)

Apr. 30..... Couchsurfingcook.com union ..................– J. R. Baron ...................425.60 ................................. Cash.................................... 425.60 (To record NSF check)

Apr. 30 .....Miscellaneous cost .........30 ..................................Cash........................................30 (To document charge because that printing agency checks)

Study Objective 5 - define the reporting of Cash

Cash is videotaped in both the balance sheet and the statement of cash flows. The balance sheet shows the amount of cash obtainable at a given allude in time. The explain of cash flows mirrors the sources and also uses the cash throughout a period of time. Cash on hand, cash in banks, and petty cash are often combined and reported simply as cash. Cash is the most liquid asset and listed very first in the existing assets section of the balance sheet. many companies use the designation "Cash and cash equivalents" in reporting cash. Cash equivalents space short-term, highly liquid invest that are both: readily convertible come known amounts of cash, and So near their maturity that their industry value is reasonably insensitive to alters in attention rates. A an unfavorable balance in the cash account need to be rare. It need to be reported amongst current liabilities. A firm may have cash that is not obtainable for general use but rather is restricted for a special purpose. Cash minimal in use should be reported independently on the balance sheet together restricted cash. If the limited cash is supposed to be provided within the following year, the amount need to be reported as a present asset. When this is no the case the restricted funds should be reported together a noncurrent asset.

Study Objective 6 - talk about the straightforward Principles that Cash monitoring

Many service providers struggle, not due to the fact that they failure to create sales, but because they cannot manage their cash. Managing the often-precarious balance developed by the ebb and also flow that cash during the operating cycle is among a company’s biggest challenges.

monitoring of cash is the responsibility of the firm treasurer. A agency can enhance its chances of having actually adequate cash by adhering to five simple principles that cash management: Increase the speed of collection on receivables The much more quickly customers pay the more quickly a agency can use those funds. Any type of attempt to pressure customers to pay earlier must be closely weighted against the possibility of angering or alienating customers. One common means to encourage customers to pay much more quickly is to sell cash discounts for early on payment. Keep perform levels short Maintaining large inventories ties up huge amounts the cash, as well as warehouse space. Increasingly, firms space using techniques to alleviate the perform on hand, thus conserving their cash. Delay payment of liabilities