Internal Control

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Chapter 7
Internal Control Cash
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WALT DISNEY COMPANY

• Walt Disney Company
• Has extensive cash collection, control activities
  to protect against fraud, errors
• Cash collected, counted, deposited from all
  activities
• Collections in form of cash, credit cards,
  checks, electronic funds

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Accounting For CashReconciling The Bank
Statement

• An important part of internal control
• Need for calculating a true cash balance
• Two sides to be reconciled
• balance per bank
• balance per books
• If there are any mistakes or transactions that
  have not been recorded in the companys books,
  the companys records should be updated.

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Cash (Bank) Reconciliation Has Two Independent
Parts
Balance per bank
Balance per books

• deposits in transit
• Bank errors
• -- outstanding checks
• -- Bank errors
• True cash balance

• collections for us made by the bank
• or our errors
• -- NSF checks (from customers)
• -- Service charges
• True cash balance

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Terminology

• Bank statement
• Monthly report prepared by bank that contains
  details of a companys deposits, disbursements,
  and bank charges.
• Bank reconciliation
• Report prepared by the company after receiving
  the bank statement that compares the bank
  statement with the companys records to verify
  the accuracy of both.

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More Terminology

• Outstanding check
• A check written by the company that has been
  recorded on the companys records but has not yet
  cleared the bank
• Deposit in transit
• A deposit that the company has made and
  recorded, but it has not reached the banks
  record keeping system yet.

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More Terminology

• NSF check

• A bad check written by a customer that must be
  deducted from the companys records. The company
  recorded the check as a cash receipt (and then
  deposited it), but the check writer didnt have
  the money in his or her account to cover it. The
  bank will have already deducted it from the
  companys balance (in the banks records), but
  the company will have to make an adjustment to
  their records.

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More Terminology

• Credit memo
• An addition to the companys balance in the
  banks records for a reason such as the bank
  having collected a note for the company (from a
  third party who owed the company).
• Debit memo
• A deduction from the companys balance in the
  banks records for a reason such as a bank
  service charge.

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An Example Of A Reconciliation

• Given the following information
• Balance per bank at 4/30 8,750
• Balance per books at 4/30 6,900
• Outstanding checks at 4/30 1,380
• Bank service charge for April 30
• Deposit in transit at 4/30 400
• Customers NSF check 100
• (returned with bank statement)
• Bank collected note receivable 1,000 for
  company

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Cash (Bank) Reconciliation Has Two Independent
Parts
Balance per bank
Balance per books

• deposits in transit
• -- outstanding checks
• --
• True cash balance

• collections for us made by the bank
• -- NSF checks (from customers)
• -- Service charges
• True cash balance

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Balance Per Bank Section Of The Reconciliation

• Balance per bank
• Plus Deposit in transit
• Less Outstanding checks (______)
• Cash Balance at 4/30 _______

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Balance Per Books Section Of The Reconciliation

• Balance per books
• Plus Note collected by bank
• Less NSF check returned (____0)
• Service charge ( __)
• Cash balance at 4/30

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An Example Of A Reconciliation

• Given the following information
• Balance per bank at 4/30 8,750
• Balance per books at 4/30 6,900
• Outstanding checks at 4/30 1,380
• Bank service charge for April 30
• Deposit in transit at 4/30 400
• Customers NSF check 100
• (returned with bank statement)
• Bank collected note receivable 1,000 for
  company

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Balance Per Books Section Of The Reconciliation

• Balance per books 6,900
• Plus Note collected by bank
• Less NSF check returned (____0)
• Service charge ( __)
• Cash balance at 4/30

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Balance Per Books Section Of The Reconciliation

• Balance per books 6,900
• Plus Note collected by bank
  1,000
• Less NSF check returned
  (_100)
• Service charge (
  30)
• Cash balance at 4/30
  7,770

• Entices to adjust book to true cash balance
• Increase _____________________________.
• Decrease ____________________________.
• Decrease _____________________________.

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There Is One True Cash Balance

• Bank balance per statement is reconciled to the
  TRUE cash balance
• Book balance (companys records) is reconciled to
  the TRUE cash balance

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LEARNING GOALS
1
Describe Sarbanes-Oxley Act, 2002, its impact on
internal control, reporting.
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BEFORE SARBANES-OXLEY
Cause Enron, Tyco, Worldcom, etc. and Arthur
Anderson LLP.
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SARBANES-OXLEY ACT 2002
LG 1
Congress attempt to restore public
confidence Requires public companies to improve
internal controls that safeguard assets
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LEARNING GOALS
2
Describe, illustrate objectives, elements of
internal control.
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LG 2
INTERNAL CONTROL OBJECTIVES
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LG 2
INTERNAL CONTROL Additional Objectives

• Promotes effective and efficient ___________.
• Protects _____loyees from suspicion and ________.
• Promotes desired _______ of service and/or
  products.

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INTERNAL CONTROL?
LG 2
How does management achieve its internal control
objectives?
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LG 2
CONTROL ENVIRONMENT
Control ______________ is management, employee
attitudes about importance of internal control
Continued
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CONTROL ENVIRONMENT
LG 2
Respect Competency Honesty
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RISK ASSESSMENT
LG 2
____ assessment identifies risks so management
can take steps to control them.
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CONTROL PROCEDURES
LG 2
Control Procedures
Competent personnel __________ responsibilities Se
parating operations Security measures
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LEARNING GOALS
3
Describe, illustrate application of internal
controls to cash.
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LG 3
CONTROL CASH RECEIPTS

• To protect cash from theft when
• Customers buy products, services
• Customers pay on account

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CASH RECEIPTS
LG 3
Cash deposits
Cash Records
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RECORDING PROCESS
LG 3
Continued
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CASH DEPOSITS
LG 3
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CASH PAYMENTS
LG 3

• Payment made through
• Voucher system
• _________

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LEARNING GOALS
4
Describe nature of bank account, its use in
controlling cash.
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BANK ACCOUNTS
LG 4

• Bank accounts control accounts by
• Safeguarding cash
• Providing double recording of cash transactions
• Providing comparison with business records

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BANK RECONCILIATION
LG 5
Bank Statement
Company Cash Records
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PETTY CASH
LG 6
For small payments in office Funded from bank
account
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ENTRY TO INCREASE PETTY CASH
LG 6
8/1 Petty Cash Cash
500 500
To create petty cash Has no effect on cash
flows Has no net effect on balance sheet Has no
effect on income statement
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ENTRY TO REPLENISH PETTY CASH
LG 6
8/31 Office Supplies Store supplies
Misc. Exp. Cash
402 35 30 467
To replenish petty cash, recognize expenses
Increases cash flow operations Net increase
assets, increases equity on balance
sheet Increases revenue on income statement
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LEARNING GOALS
7
Describe, illustrate reporting cash, cash
equivalents in financial statements.
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LG 7
CASH EQUIVALENTS

• Includes
• Money market mutual funds
• Commercial paper
• Certificates of deposit
• Government municipal securities
• Corporate notes, bonds