Internal Control and Cash

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UNIT
7
INTERNAL CONTROL AND CASH
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INTERNAL CONTROL

• Internal control consists of the policies and
  procedures adopted within a business in order to
• 1. optimize resources, and
• 2. prevent and detect errors and
  irregularities.

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INTERNAL CONTROL
Internal control consists of the policies and
procedures adopted within a business in order
to 3. Safeguard its assets 4. Maintain the
accuracy and reliability of its accounting
records
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ILLUSTRATION 8-1
PRINCIPLES OF INTERNAL CONTROL

• Authorization
• Segregation of duties
• Documentation procedures
• Safeguarding assets and records
• Independent verification

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PRINCIPLES OF INTERNAL CONTROL

• Authorization of transactions and activities
  Authorization by the proper individual is
  important. Control is most effective when only
  one person is responsible for a given task.
• Segregation of duties The work of one employee
  should provide a reliable basis for
  evaluating the work of another
  employee.

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PRINCIPLES OF INTERNAL CONTROL

• Documentation procedures Documents should
  provide evidence that transactions and events
  have occured.
• Safeguards to control access to, and use of,
  assets and records Physical, mechanical, and
  electronic controls relate primarily to the
  safeguarding of assets and enhancing accuracy and
  reliability of the accounting records.

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PRINCIPLES OF INTERNAL CONTROL

• Independent verification
• External verification indicates whether the
  companys financial statements fairly present its
  financial position and results of operations in
  accordance with GAAP.
• Internal verification involves review,
  comparison, and reconciliation of information
  from two sources.

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ILLUSTRATION 8-3 RELATIONSHIP BETWEEN
SEGREGATION OF DUTIES AND INDEPENDENT INTERNAL
VERIFICATION
Segregation of Duties
Accounting Employee A
Assistant Cashier B

• Maintains cash balances
  Maintains custody
  of per books
  
  cash on hand
  
  
  
• Makes monthly comparisons reports any
  irreconcilable differences to comptroller

Independent Internal Verification
Assistant Comptroller C
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LIMITATIONS OF INTERNAL CONTROL

• Cost/benefit
• Collusion
• Size of business
• Human element

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CASH

• Cash includes coins, currency, cheques, money
  orders, and money on hand or on deposit at a bank
  or similar depository.
• Internal control over cash is imperative in order
  to safeguard cash and assure the
  accuracy of the accounting
  records for cash.

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CONTROL OVER CASH RECEIPTS

• Only designated personnel should be authorized to
  handle or have access to cash receipts.
• Different individuals should
• 1. receive cash
• 2. record cash receipt transactions
• 3. have custody of cash

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CONTROL OVER CASH RECEIPTS

• Documents should include
• 1. remittance advices
• 2. cash register tapes
• 3. deposit slips
• Cash should be stored in safes and bank vaults.
• Access to storage areas should be limited to
  authorized personnel.
• Cash registers should be used in executing
  over-the-counter receipts.

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CONTROL OVER CASH RECEIPTS

• Daily cash counts and daily comparisons of total
  receipts should be made.
• All personnel who handle cash receipts should be
  bonded and required to take vacations.
• An important tool in control of over-the-counter
  receipts is cash registers that are visible to
  customers.

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CONTROL OVER CASH DISBURSEMENTS

• Payments are made by cheque rather
  than by cash, except for petty cash transactions.
• Only specified individuals should
  be authorized to sign cheques.
• Different departments or individuals should be
  assigned the duties of approving an item for
  payment and paying it.

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CONTROL OVER CASH DISBURSEMENTS

• Prenumbered cheques should be used and each
  cheque should be supported by an approved
  invoice or other document.
• Blank cheques should be stored
  in a safe.
• 1. Access should be restricted to
  authorized personnel.
• 2. A cheque writer machine should be
  used to imprint the amount on the cheque in
  indelible ink.

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CONTROL OVER CASH DISBURSEMENTS

• Each cheque should be compared with the approved
  invoice before it is issued.
• Following payment, the approved invoice should be
  stamped PAID.

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PETTY CASH FUND

• A petty cash fund is used to pay relatively
  small amounts.
• Operation of the fund, often called an imprest
  system, involves
• 1. establishing the fund,
• 2. making payments from the fund, and
• 3. replenishing the fund.
• Accounting entries are required when
• 1. the fund is established,
• 2. the fund is replenished, and
• 3. the amount of the fund is changed.

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USE OF A BANK

• The use of a bank minimizes the amount of
  currency that must be kept on hand and
  contributes significantly to good internal
  control over cash.
• A company can safeguard
  its cash by using a bank as
  a depository and clearing
  house for cheques
  received and
  cheques written.

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REPORTING CASH

• Cash reported on the Balance Sheet includes
• 1. Cash on hand
• 2. Cash in banks
• 3. Petty cash
• Cash is listed first in the balance sheet
  because it is the most liquid asset.

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CASH EQUIVALENTS

• Cash equivalents are highly liquid investments,
  with maturities of three months or less when
  purchased, that can be converted into a specific
  amount of cash.
• Examples include money market funds, short-term
  notes, and treasury bills.