Post on 13-Feb-2018
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Sarbanes-Oxley, Internal Control, and Cash
Chapter 7 Student Version These slides should be viewed
using the presentation mode (left
click your mouse on the icon).
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Learning Objective 1
Describe the
Sarbanes-Oxley Act of
2002 and its impact on
internal controls and
financial reporting.
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Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (often
referred to simply as Sarbanes-Oxley)
applies only to companies whose stock is
traded on public exchanges. Its purpose is
to restore public confidence and trust in
the financial statements of companies.
LO 1
Sarbanes-Oxley requires companies to
maintain strong and effective internal
controls over the recording of transactions
and the preparing of financial statements.
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LO 1
Sarbanes-Oxley Act of 2002
Internal control is broadly defined as the
procedures and processes used by a
company to:
Safeguard its assets.
Process information accurately.
Ensure compliance with laws and
regulations.
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Learning Objective 2
Describe and
illustrate the
objectives and
elements of internal
control.
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Elements of Internal Control
Management is responsible for designing
and applying five elements of internal
control to meet the three internal control
objectives. These elements are control
environment, risk assessment, control
procedures, monitoring, information and
communication.
LO 2
Employee fraud is the intentional act of
deceiving an employer for personal gain.
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Control Environment
The control environment is the overall
attitude of management and employees
about the importance of controls. Three
factors influencing a company’s control
environment are:
LO 2
Management’s philosophy and operating
style
The company’s organizational structure
The company’s personnel policies
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Control Procedures
Control procedures provide reasonable
assurance that business goals will be
achieved. Control procedures include:
Competent personnel, rotating duties, and
mandatory vacations
Separating responsibilities for related
operations
Separating operations, custody of assets, and accounting
Proofs and security measures
LO 2
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Monitoring
Monitoring the internal control system is
used to locate weaknesses and improve
controls.
LO 2
Monitoring often includes observing
employee behavior and the accounting
system for indicators of control problems.
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Limitations of Internal Control
Internal controls can provide only
reasonable assurance for safeguarding
assets, processing accurate information,
and compliance with laws and regulations.
This is due to:
The human element of controls
Cost-benefit considerations
LO 2
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Learning Objective 3
Describe and
illustrate the
application of
internal controls
to cash.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Cash Controls Over Receipts and Payments
Cash includes coins, currency (paper
money), checks, and money orders. Money
on deposit with a bank or other financial
institution that is available for withdrawal is
also considered cash.
Cash is the asset most likely to be stolen or
used improperly in a business.
LO 3
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Control of Cash Receipts
Businesses normally receive cash from two
main sources:
Customers purchasing products or services
Customers making payments on account
LO 3
One of the most important controls to
protect cash received in over-the-counter
sales is a cash register.
A predetermined amount of money that is
given to each cash register clerk in a cash
drawer is called a change fund.
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LO 3
Control of Cash Receipts
Salespersons may make errors in making
change for customers or in ringing up cash
sales. As a result, the amount of cash on
hand may differ from the amount of cash
sales. Such differences are recorded in a
cash short and over account.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Cash sales for May 3 totaled $35,690 per the cash
register tape. After removing the change fund, only
$35,668 was left in the cash drawer. The cash sales
and shortage would be recorded as follows:
Cash Received from Cash Sales
LO 3
If there had been cash over, Cash Short and Over
would have been credited for the overage.
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Cash Received in the Mail and by EFT
Cash is received in the mail when
customers pay their bills. Most companies
design their invoices so that customers
return a portion of the invoice, called a
remittance advice, with their payment.
LO 3
Cash may also be received from customers
through electronic funds transfers (EFT).
Customers may authorize automatic
electronic transfers from their checking
accounts to pay monthly bills.
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Cash Received by EFT
Companies encourage customers to use EFT
for the following reasons:
1. EFTs cost less than receiving cash payments
through the mail.
2. EFTs enhance internal controls over cash
since the cash is received directly by the
bank without any employees handling cash.
3. EFTs reduce late payments from customers
and speed up the processing of cash
receipts.
LO 3
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Control of Cash Payments
The control of cash payments should
provide reasonable assurance that:
Payments are made for only authorized
transactions.
Cash is used effectively and efficiently.
LO 3
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Voucher System
A voucher system is a set of procedures for
authorizing and recording liabilities and
cash payments. It may be either manual or
computerized.
A voucher is any document that serves as
proof of authority to pay cash or issue an
electronic funds transfer.
LO 3
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Learning Objective 4
Describe the nature
of a bank account
and its use in
controlling cash.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Bank Accounts
A major reason that businesses use bank
accounts is for internal control. Some of the
control advantages of using bank accounts
are as follows:
Bank accounts reduce the amount of cash
on hand.
Bank accounts provide an independent recording of cash transactions.
Use of bank accounts facilitates the transfer
of funds using EFT systems.
LO 4
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Bank Statement
A summary received from the bank (usually
monthly) of all checking account
transactions is called a bank statement. It
shows the beginning balance, additions,
deductions, and the ending balance.
LO 4
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Learning Objective 5
Describe and illustrate
the use of a bank
reconciliation in
controlling cash.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Bank Reconciliation
A bank reconciliation is an analysis of the
items and amounts that cause the cash
balance reported in the bank statement to
differ from the balance of the cash account
in the ledger. This is used to determine the
adjusted cash balance.
LO 5
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LO 5
Power Networking Bank Reconciliation
Bank’s Records Power Networking’s Records
Cash balance $3,359.78
Power Networking
prepares to reconcile
the monthly bank
statement as of July 31.
The bank statement
shows an ending cash
balance of $3,359.78.
Step 1
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LO 5
Power Networking Bank Reconciliation
Add deposit not
recorded by bank 816.20
$4,175.98
Bank’s Records Power Networking’s Records
Cash balance $3,359.78
A deposit on July 31
of $816.20 is not
recorded on the
bank statement.
Step 2
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Power Networking Bank Reconciliation
Add deposit not
recorded by bank 816.20
$4,175.98
Bank’s Records Power Networking’s Records
Cash balance $3,359.78
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Step 3
Three checks that were
written during the month
did not appear on the
bank statement: No.
812, $1,061; No. 878,
$435.39, No. 883,
$48.60.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Power Networking Bank Reconciliation
Add deposit not
recorded by bank 816.20
$4,175.98
Bank’s Records Power Networking’s Records
Cash balance $3,359.78
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
$2,630.99 Adjusted balance
Step 4
Determine the
adjusted balance.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Power Networking Bank Reconciliation
Add deposit not
recorded by bank 816.20
$4,175.98
Bank’s Records Power Networking’s Records
Cash balance $3,359.78
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
$2,630.99 Adjusted balance
Step 5
The cash balance in
Power Networking’s
ledger on July 31 is
$2,549.99.
Cash balance $2,549.99
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Power Networking Bank Reconciliation
Add deposit not
recorded by bank 816.20
$4,175.98
Bank’s Records Power Networking’s Records
Cash balance $3,359.78
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
$2,630.99 Adjusted balance
Step 6
Cash balance $2,549.99
A credit memo on the bank
statement indicates that the
bank collected a note in the
amount of $400 and the
related interest of $8 for
Power Networking.
Add note and interest
collected by bank 408.00
$2,957.99
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
A check from a customer (Thomas Ivey) for $300
was returned by the bank because of insufficient
funds (NSF) as indicated by a debit memo. A bank
service charge of $18 was also indicated by a debit
memo.
Step 7
Power Networking Bank Reconciliation
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Add deposit not
recorded by bank 816.20
$4,175.98
Bank’s Records Power Networking’s Records
Cash balance $3,359.78 Cash balance $2,549.99
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Add note and interest
collected by bank 408.00
$2,957.99
LO 5
$2,630.99 Adjusted balance
Deduct NSF
check $300.00
Bank service
charges 18.00
Step 7
Power Networking Bank Reconciliation
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Check No. 879 for $732.26 to Taylor Company on
account was erroneously recorded in the journal as
$723.26. When an error is made, two questions are
asked: (1) Who made the error? (2) Does
correcting the error cause the cash account to go
up or down?
Error
Power Networking Bank Reconciliation
(continued)
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LO 5
Error
Power Networking Bank Reconciliation
Power Networking made the error, so the item is
placed on the company’s side of the reconciliation.
By correcting the error, the cash account goes
down. (Thus, it is a deduction on the reconciliation.)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Add deposit not
recorded by bank 816.20
$4,175.98
Bank’s Records Power Networking’s Records
Cash balance $3,359.78 Cash balance $2,549.99
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Add note and interest
collected by bank 408.00
$2,957.99 Deduct check
NSF $300.00
Bank service
charges 18.00
LO 5
$2,630.99 Adjusted balance
Error
Error recording
Chk. No. 879 9.00
Power Networking Bank Reconciliation
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Add deposit not
recorded by bank 816.20
$4,175.98
Bank’s Records Power Networking’s Records
Cash balance $3,359.78 Cash balance $2,549.99
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Add note and interest
collected by bank 408.00
$2,957.99 Deduct check
NSF $300.00
Bank service
charges 18.00
LO 5
$2,630.99 Adjusted balance
Error recording
Chk. No. 879 9.00 327.00
$2,630.99 Adjusted balance
Step 8
Power Networking Bank Reconciliation
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Bank’s Records Power Networking’s Records
Add deposit not
recorded by bank 816.20
$4,175.98
Cash balance $3,359.78 Cash balance $2,549.99
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Add note and interest
collected by bank 408.00
$2,957.99 Deduct check
NSF $300.00
Bank service
charges 18.00
$2,630.99 Adjusted balance $2,630.99 Adjusted balance
Step 9
Power Networking Bank Reconciliation
Error recording
Chk. No. 879 9.00 327.00
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The journal entries for Power Networking, based
on the bank reconciliation, are as follows:
LO 5
Power Networking Bank Reconciliation
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Learning Objective 6
Describe the accounting
for special-purpose
cash funds.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 6
Petty Cash Fund
It is usually not practical for a business to
write checks to pay small amounts. Thus, it
is desirable to control such payments by
using a special cash fund, called a petty
cash fund.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
A petty cash fund of $500 is established on August
1. The entry to record the transaction is as follows:
Petty Cash Fund
LO 6
At the end of August, the petty cash receipts
indicate expenditures for the following items: office
supplies, $380; postage (debit Office Supplies),
$22; store supplies, $35; and miscellaneous
administrative expense, $30.
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Petty Cash Fund
LO 6
The entry to replenish the petty cash fund is
shown below.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Special-Purpose Funds
LO 6
Companies often use other cash funds for
special needs, such as payroll or travel
expenses. Such funds are called special-
purpose funds.
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Learning Objective 8
Describe and illustrate the
use of the ratio of cash to
monthly cash expenses to
assess the ability of a
company to continue in
business.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 8
Ratio of Cash to Monthly Cash Expenses
A cash ratio that is especially useful for
startup companies or companies in
financial distress is the ratio of cash to
monthly cash expenses. The ratio is
computed as shown below:
Ratio of Cash to
Monthly Cash Expenses =
Cash as of Year-End
Monthly Cash Expenses
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Ratio of Cash to Monthly Cash Expenses
Cash, including any cash equivalents, is
taken from the balance sheet as of year-
end. The monthly cash expenses,
sometimes called cash burn, are estimated
from the operating activities section of the
statement of cash flows as follows:
LO 8
Monthly Cash Expenses =
Negative Cash Flow
from Operations
12
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Sarbanes-Oxley, Internal Control, and Cash
The End