Internal Control and Cash

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CHAPTER 7

• Internal Control and Cash

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Internal Control

• Safeguard assets
• Cash (receipts and disbursements)
• Inventory
• Insure accuracy and reliability of accounting
  information

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Segregation of Duties

• After counting the cash drawer, the cashier
  records and deposits the cash receipts.

• Weakness
• No segregation of duties
• Improvement
• Different individuals total the cash deposit and
  make the daily deposit.

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Physical Controls

• All bills over 20 are taken out of the register
  and placed behind the customer service counter
  until the daily deposit is prepared.

• Weakness
• Cash, which is not in registers being operated,
  should be kept in a safe.
• Improvement
• Use a store safe with limited access.

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Establish Responsibilities

• During each shift, four customer service
  personnel share the same cash register.

• Weakness
• No clear cut responsibility of cash
• Improvement
• Have sales personnel to assist customers and one
  person to perform register duties.

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Independent Verification

• The accounts payable manager approves all
  payments before signing the checks.

• Weakness
• Too much authority for one position
• Improvement
• Have the controller or treasurer also verify and
  then sign the checks.

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Documentation

• Cash sale invoices are all logged under the same
  invoice number which corresponds to the date of
  sale.

• Weakness
• No backup to balance to cash in the register
• All sales, including cash, should be listed on a
  prenumbered invoice.

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Other Control Procedures

• Bond employees
• Mandatory vacations
• Reconciliation of cash
• Internal audit departments

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Bank Reconciliation

• Bank Balance
• Add adjustments (A)
• Sub-Total
• Deduct Adjustments (B)
• Adjusted Bank Balance

• Book Balance
• Add adjustments (C)
• Sub-Total
• Deduct Adjustments (D)
• Adjusted Book Balance

(E) Not a reconciling item
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The bank collected a note receivable of 1,000
plus 50 of interest.
C
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Checks outstanding from last month in the amount
of 2,300 cleared during the month.
E
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Included with the bank statement is a check, in
the amount of 260, from a customer marked NSF.
D
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End of the month cash receipts of 6,700 were
not included in with the other deposits.
A
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A check issued and cleared as 830 was
incorrectly recorded as 380.
D
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Debit memorandum issued by bank for
monthly service charges.
D
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Included and deducted on the bank statement is a
check from another company.
A
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Checks written in the current month that are
not listed on the bank statement total 4,200.
B
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Checks written last month that are not listed on
the bank statement total 600.
B
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Bank issued credit memorandum of 1,900 for EFT
(electronic funds transfer).
C
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Deposits totaling 7,400 are listed on the bank
statement.
E
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Which adjustments require an adjusting entry?

• All entries that increase the book balance (C).
• Debit cash and credit all of the related accounts.

• All entries that decrease the book balance (D).
• Credit cash and debit all of the related accounts.

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Petty Cash

• A fund used to pay small expenses.
• Operating a petty cash fund includes
• Establishing the fund
• Payments out of the fund
• Replenishing the fund

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Establishing the Fund

• On May 1st, James Brothers establishes a petty
  cash fund for 100.

• May 1 Petty Cash 100
• Cash 100

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Payments out of the Fund

• 5/3 Gas 15.00
• 5/8 Postage 4.00
• 5/11 Supplies 8.00
• 5/15 Copies 12.00
• 5/16 Meals 35.00
• 5/22 Postage 13.00
• 5/27 Gas 7.00

• For each disbursement a voucher is written by the
  petty cashier showing the amount, person
  receiving cash, date, and supporting
  documentation of the expense. NO journal entry
  is recorded for payment from the petty cash fund.

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Replenishing the Fund

• Cash remaining on May 31st totals 2.00.
• Receipts total 94.00.
• The petty cash fund must retain the original
  balance of 100.
• The difference of 4.00 is charged to Cash Over
  and Short (an expense account).

• May 31 Gas Expense 22
• Supplies 20
• Postage Expense 17
• Miscellaneous Expense 35
• Cash Over and Short 4
• Cash 98

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Remember
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