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Chapter 8

Cash and Internal Control

QuestionAnswer
Components of internal control (5): control environment, risk assessment, control activities, information and communication, and monitoring
Control Environment created by the management's overall attitude, awareness, and actions
Control Environment encompasses: company's ethics, philosophy, and operating style; organizational structure; method of assigning authority and responsibility; personnel policies and practices
An adjustment to the merchandise inventory account will be needed: if the physical inventory reveals a difference between the actual inventory and the amount in the records
risk assessment involves identifying areas in which risks of loss of assets or inaccuracies in accounting records are high so that adequate controls can be implemented. Among the greater risks in a retail store are that employees and customers may steal cash or goods.
control activities the policies and procedures management puts in place to see that its directives are carried out
information and communication pertains to the way the accounting system gathers and treats information about the company's transactions and to how it communicates individual responsibilities within the system
monitoring management's regular assessment of the quality of internal control, including periodic review of compliance with all policies and procedure, is part of monitoring. Large companies have auditors who review the system of internal control
The goal of control activities: is to safeguard a company's assets and ensure reliability of its accounting records
authorization the approval of certain transactions and activities; in a retail store cashiers authorize cash sales; but other transactions such as issuing a refund may require a manager's approval
recording transactions to establish accountability for assets, all transactions should be recorded
documents and records well designed documents help ensure that transactions are properly recorded. For example, using prenumbered invoices and other documents is a way of ensuring that all transactions are recorded
physical controls limit access to assets. For example, in a retail store, only the person responsible for the cash register should have access to it. Similarly, only authorized personnel should have access to warehouses and storerooms
Periodic Independent Verification means that someone other than the people responsible for the accounting records and assets should periodically check the records against the assets; for example, managers checking and counting the cash in the cash drawer and compare the amount
separation of duties means that no one person should authorize transactions, handle assets, and keep records of assets; separation of duties means that a mistake, careless or not, cannot be made without being seen by at least one other person
sound personnel practices: personnel practices that promote internal control include: adequate supervision, rotation of key people, insistence that employees take vacations, and bonding of personnel who handle cash or inventory
bonding is the process of carefully checking an employee's background and insuring the company against theft by that person. Bonding does not gurantee against theft but it does prevent or reduce loss if theft occurs
Internal control and achieving control objectives can help managers achieve the following: keep enough inventory on hand to sell to customers without overstocking merchandise; keep sufficient cash on hand to pay for purchases in time to receive discounts; keep credit losses low as pssbl by making credit sales to customers who will pay on time
While no control procedure can guarantee the prevention of theft: the more that are in place, the less likely it is that theft will occur
By maintaining adequate cash balances, a company is able to take advantage of: discounts on purchases, prepared to borrow money when necessary, and able to avoid the damaging effects of being unable to pay bills when they are due
Most firms, should use the following procedures for effectiveness of internal control over cash: separate the functions of authorization, limit the # of ppl who have access to cash, bond all emplyes who have cash access, keep amnt of cash minimal, physically protect cash on hand by using registers and safes, record and deposit all cash recpts
the cashier should not be allowed to remove the cash register from the tape or to record the day's cash receipts
cash receipts journal prevent: whatever the source of cash it should be recorded immediately in a cash receipts journal to establish a written record that prevents errors and make theft more difficult
control of cash by mail cash received by mail is vulnerable to theft by employees who handle it. For that reason companies that deal with in mail-order sales ask customers to pay by credit card, check, or money order instead; if money is received by mail two or more employees
control of cash received over the counter cash registers and prenumbered sales tickets are common tools for controlling cash received over the counter; should be recorded on tape and the number on the tape should match the amount of money turned in
cash disbursements are vulnerable to what? fraud and embezzlement
to avoid theft with cash disbursements: cash payments should be made only after they have been specifically authorized and supported by documents that establish the validity and amount of the claims; company should separate the duties involved in purchasing goods/services & duties for payment
What does the statement of cash flow explain? the change in the balance of cash and cash equivalents from one period to the next
if investments have a term of 90 days or less when they are purchased they are known as: cash equivalents
cash equivalents the funds revert back to cash so quickly they are treated as cash on the balance sheet
Most companies record cash equivalents at their approximate: fair value, or market value
Bank reconciliations are an important factor in .... internal control if carried out by someone who cannot access the company's bank account, they provide an independent check on people who do have access
imprest systems most companies need to keep some currency and coins on hand (petty cash) for cash registers, paying expenses that are impractical to pay by check, and for situations that require cash advances
banking services banks provide safe depositories for cash, negotiable instruments, and other valuable business documents such as stocks and bonds
electronic funds transfer is a method of conducting business transactions that does not involve the actual transfer of cash. With EFT, a company electronically transfers cash from its bank to another company's bank. IS simply a bookkeeping entry
bank reconciliations rarely does the balance of a company's cash account exactly equal the cash balance on its bank statement. The bank may not yet have recorded certain transactions that appear in the company's records, and the company may not recorded bank transactions
bank reconciliations may have the following transactions bank reconciliation is the process of accounting for the difference between the balance on a company's bank statement and the balance in its cash account; outstanding checks and deposits in transits appear on bank statement
What transactions would appear on the booking reconciliation? service charges, NSF, misc. debits and credits, interest income
what does a credit memorandum mean? an amount was added to the bank balance; a debit memorandum means that an amount was deducted
the ending balance on a company's bank statement does not represent what the amount of cash that should appear its balance sheet. At the balance sheet date, deposits may be in transit to the bank, and some checks may be outstanding. That is why companies must prepare a bank reconciliation
It is possible to place an item in the wrong section of a bank reconciliation and arrive at equal adjusted balances that are not correct. However,... the correct (and equal) adjusted balances must be obtained
outstanding checks checks that a company has issued and recorded but do not yet appear on bank statement
deposits in transit deposits a company has sent to its bank but the bank did not receive in time to enter on the bank statement
service charges (SC) banks often charge a fee for the use of a checking account
NSF (nonsufficient funds) checks: a check that a company has deposited but that is not paid when the bank presents it to the issuer's bank. The bank charges the company's account and returns the check so the company can try to collect the amount due
interest income banks commonly pay interest on a company's average balance. Accounts that pay interest are sometimes called NOW or money market accounts
Even though withdrawels from petty cash are generally small, the cumulative total over time can represent a substantial amount. accordingly, an effective system of internal control must be established for the fund
establishing the petty cash debit petty cash and credit cash
making disbursements from the petty cash fund the custodian of the petty cash fund should prepare a petty cash voucher or written authorization for each expenditure where the date, amount, and purpose are presented. the person who receives the payment signs the voucher
reimbursing the petty cash fund when the fund becomes low, and at the end of a period, the petty cash fund is replenished by a check issued to the custodian for the exact amount of the expenditures
from time to time, they may be minor discrepancies in the amount of cash left in the fund at the time of reimbursement. In those cases the amounts of the discrepancy is recorded in a cash short or over account- as a debit if short or credit if over
reimbursing petty cash fund journal entry debit postage expense, supplies expense, freight-in, cash short or over, credit cash
management's responsibility for internal control establishing a satisfactory system of internal controls; must safeguard the firm's assets, ensure the reliability of its accounting records, and see that its employees comply with all legal requirements and operate the firm to the best advgt to the owner
What requires the chief executive officer, the chief financial officer, and the auditors of a public company fully document and certify the company's system of internal controls section 404 of the Sarbanes Oxley Act
Independent Accountant's Audit of Internal Control privately owned companies are not required to have an independent certified public accountant audit their financial statements, choose to do so. Also, not required for audit of internal control. Public companies however are required to have both.
Created by: krystalamber04