INTERNAL%20CONTROL%20AND%20CASH

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CHAPTER 8

• INTERNAL CONTROLAND CASH
• ??????? ???????? ??? ?????

Accounting Principles, Eighth Edition
2
Internal Control

• Methods and measures adopted to
• Safeguard assets. ????? ??????
• Enhance accuracy and reliability of accounting
  records. Reduce risk of ????? ????? ????
  ???????? ??? ??????? ?????????
• Errors (unintentional) ????? ????? ??????? ???
  ????????
• Irregularities (intentional) ?? ??????? ????????

LO 1 Define internal control.
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Internal Control
The Sarbanes-Oxley Act ??? ??????? ????? ??????
??????? ???????? ?? ???????? ??? 2005 ??? ?????
?? ??????? ????????? ????? ????? ??????? ??????
?? ??????? ????????? ??????

• Companies must
• develop principles of control over financial
  reporting.
• ????? ????? ??????? ???????? ??? ???????? ???????
• continually verify that controls are working.
• ?????? ???????? ?? ?? ???? ??????? ???? ???? ???

Independent auditors must attest to the level of
internal control. ???????? ????????? ??? ??
??????? ?? ?????? ????? ??????? ???????? SOX
created the Public Company Accounting Oversight
Board (PCAOB).
LO 1 Define internal control.
4
Internal Control
Principles of Internal Control ????? ???????
????????
Illustration 8-1

• Measures vary with
• size and nature of the business.
• ??? ?????? ?????? ?????
• managements control philosophy.
• ????? ??????? ?? ???????

LO 2 Identify the principles of internal control.
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Internal Control
Principles of Internal Control
Illustration 8-3
PHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS
Physical ??? ?????
Mechanical and Electronic ??? ?????????
LO 2 Identify the principles of internal control.
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Internal Control
Principles of Internal Control

• INDEPENDENT INTERNAL VERIFICATION
• Records periodically verified by an employee who
  is independent.
• Discrepancies reported to management.

• OTHER CONTROLS
• Bond employees. ????? ??????
• Rotate employees duties and require
  vacations.????? ???????? ??? ???????
• Conduct background checks. ????? ??????? ???????

LO 2 Identify the principles of internal control.
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Cash Controls
Internal Control over Cash Receipts
Independent Internal Verification Supervisors
count cash receipts daily treasurer compares
total receipts to bank deposits daily
Establishment of Responsibility Only designated
personnel are authorized to handle cash receipts
(cashiers)
Documentation Procedures Use remittance advice
(mail receipts), cash register tapes, and deposit
slips
Segregation of Duties Different individuals
receive cash, record cash receipts, and hold the
cash
Physical, Mechanical, and Electronic
Controls Store cash in safes and bank vaults
limit access to storage areas use cash registers
Other Controls Bond personnel who handle cash
require employees to take vacations deposit all
cash in bank daily
Illustration 8-5
LO 3 Explain the applications of internal control
principles to cash receipts.
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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 ?????? ?????
• collections on account from customers
• ????????? ??????? ?? ???????
• receipt of interest, rent, and dividends
• ??????? ??????? ???????? ?????? ??????
• investments by owners ??????????? ?? ???
  ????????
• bank loans ?????? ???????
• proceeds from the sale of noncurrent assets
• ??????? ?? ????? ??? ?????? ??? ?????????

LO 3 Explain the applications of internal control
principles to cash receipts.
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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.
• ???? ?? ??????? , ???? ??? ???? ???? ???????
  ???????? ????????? ?????? ?? ???? ??????? ??????

LO 3 Explain the applications of internal control
principles to cash receipts.
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Cash Controls
Internal Control over Cash Disbursements

• Generally, internal control over cash
  disbursements is more effective when companies
  pay by check, rather than by cash.
• Applications
• Voucher system
• Electronic funds transfers (EFT) system
• Petty cash fund

LO 4 Explain the applications of internal control
principles to cash disbursements.
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Cash Controls
Internal Control over Cash Disbursements
Independent Internal Verification Compare checks
to invoices reconcile bank statement monthly
Establishment of Responsibility Only designated
personnel are authorized to sign checks
(treasurer)
Documentation Procedures Use prenumbered checks
and account for them in sequence each check must
have an approved invoice
Physical, Mechanical, and Electronic
Controls Store blank checks in safes, with
limited access print check amounts by machine in
indelible ink
Segregation of Duties Different individuals
approve and make payments check signers do not
record disbursements
Other Controls Stamp invoices PAID
Illustration 8-8
LO 4 Explain the applications of internal control
principles to cash disbursements.
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Cash Controls
Internal Control over Cash Disbursements

• Petty Cash Fund - Used to pay small amounts.
• Involves ????? ???????? ??????? ?????? ????
  ???????? ???????
• establishing the fund, ????? ???????
• making payments from the fund, and ????? ??? ??
  ?????
• replenishing the fund. ????? ????? ???????

LO 5 Describe the operation of a petty cash fund.
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Cash Controls
E8-8 Lincolnville Company uses a 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. ???? ????? ???????? ??????? ???? ??
??????? March 5 Stamp inventory
????? 39 March 7 Freight-out?????? ??? ?????
?????? 21 March 9 Miscellaneous expense??????
?????? 6 March 11 Travel expense ?????? ???
24 March 14 Miscellaneous expense
5 The fund was replenished ???? ??????on March 15
when the fund contained 3 in cash ????? ???
??????? ????? ??? 3 ????? ???. 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.
LO 5 Describe the operation of a petty cash fund.
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Cash Controls
E8-8 The fund was established on March 1 with a
balance of 100.
Petty cash 100
March 1
Cash 100
E8-8 The fund was replenished on March 15 when
the fund contained 3 in cash.
March 15
Postage expense 39
Freight-out 21
Miscellaneous expense 11
Travel expense 24
Cash over and short 2
Cash 97
LO 5 Describe the operation of a petty cash fund.
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Cash Controls
E8-8 On March 20, the amount in the fund was
increased to 150.
Petty cash 50
March 20
Cash 50
LO 5 Describe the operation of a petty cash fund.
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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. ????? ????? ????? ?????

LO 6 Indicate the control features of a bank
account.
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Use of a Bank
Illustration 8-10
Making Bank Deposits ??????? ??? ????? Authorized
employee should make deposit.
Bank Code Numbers
Reverse Side
Front Side
LO 6 Indicate the control features of a bank
account.
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Use of a Bank
Writing Checks ????? ??????? Written order signed
by depositor directing bank to pay a specified
sum of money to a designated recipient.
Illustration 8-11
Maker ???? ?????
Payee ??????? ??
Payer ?????? (?????)
LO 6 Indicate the control features of a bank
account.
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Use of a Bank
Illustration 8-12

• Bank Statements
• Debit Memorandum ????? ????
• Bank service charge
• ??? ????? ?????
• NSF (not sufficient funds)
• ?????? ??? ???? ( ???? ??????)

• Credit Memorandum ????? ????
• Collect notes receivable.
• ????? ????? ?????
• Interest earned. ????? ?????

LO 6 Indicate the control features of a bank
account.
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Use of a Bank
Reconciling the Bank Account ????? ???? ?????

• Reconcile balance per books and balance per bank
  to their adjusted (corrected) cash balances.
• ????? ?????? ?? ??????? ??????? ?????? ?????? ???
  ?????? ??????? ????? ???????
• Reconciling Items
• Deposits in transit. ??????? ?? ?????? ?? ???? ??
  ????? ?????? ?? ?????
• ????? ???? ( ????? ???? ???????) ???
  ????? ????? ??? ????? ??????? ??
• Outstanding checks. ????? ??????? , ???? ???????
  ??? ?? ???? ?? ?????
• Errors. ?????
• Bank memoranda. ??????? ?????

LO 7 Prepare a bank reconciliation.
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Use of a Bank
Reconciliation Procedures
Illustration 8-13
Deposit in Transit - Outstanding Checks -
Bank Errors

• Notes collected by bank
• - NSF (bounced) checks
• - Check printing or other service charges
• - Book Errors

CORRECT BALANCE
CORRECT BALANCE
LO 7 Prepare a bank reconciliation.
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Use of a Bank

• E8-11 The following information pertains to
  Family Video Company.
• Cash balance per bank, July 31, 7,263.
• Cash balance per books, July 31, 7,284.
• July bank service charge not recorded by the
  depositor 28.
• Deposits in transit, July 31, 1,500.
• Bank collected 900 note for Family in July, plus
  interest 36, less fee 20.The collection has not
  been recorded by Family, and no interest has been
  accrued.
• Outstanding checks, July 31, 591.
• Instructions
• Prepare a bank reconciliation at July 31.
• Journalize the adjusting entries at July 31 on
  the books of Family Video Company.

LO 7 Prepare a bank reconciliation.
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Use of a Bank
E8-11 a) Prepare a bank reconciliation at July
31.
Cash balance per bank statement 7,263
Add Deposit in transit 1,500
Less Outstanding checks (591)
Adjusted cash balance per bank 8,172
Cash balance per books 7,284
Add Collection of notes receivable 900
Collection of interest 36
Less Bank service charge (28)
Note collection fee (20)
Adjusted cash balance per books 8,172
LO 7 Prepare a bank reconciliation.
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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
Miscellaneous expense 28
Cash
28
July 31
Cash 916
Miscellaneous expense 20
Interest revenue 36
Notes receivable 900
Note Adjusting journal entry includes only the
adjustments to the cash balance per books. ????
??????? ??? ?????? ?????? ???? ??????? ?? ?????
???????
LO 7 Prepare a bank reconciliation.