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Cash and Internal Controls. Chapter 8. Internal control principles common to all companies: Establish responsibilities. Maintain adequate records. Insure assets and bond key employees. Separate recordkeeping from custody of assets. Divide responsibility for related transactions.
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Cash andInternal Controls Chapter 8
Internal control principles common to all companies: Establish responsibilities. Maintain adequate records. Insure assets and bond key employees. Separate recordkeeping from custody of assets. Divide responsibility for related transactions. Apply technological controls. Perform regular and independent reviews. Principles of Internal Control C 1
Technology and Internal Control C 1 Reduced Processing Errors More Extensive Testing of Records Crucial Separation of Duties Limited Evidence of Processing Increased e-commerce
Human Fraud Human Error Negligence Fatigue Misjudgment Confusion Intent to defeat internal controls for personal gain Limitations of Internal Control C 1
Control of Cash C 2 An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines: Handling cashis separated from recordkeeping for cash. Cash receiptsare promptly deposited in a bank. Cash disbursements are made by check.
Cash, Cash Equivalents,and Liquidity C 2 • CashCurrency, coins and amounts on deposit in bank accounts, checking accounts, and some savings accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders. • Cash Equivalents • Short-term, highly liquid investments that are: • Readily convertible to a known cash amount. • Close to maturity date and not sensitive to interest rate changes.
Cash, Cash Equivalents,and Liquidity C 2 Liquidity How easily an asset can be converted into cashto be used to pay for services or obligations. Inventory Cash
Cash Management C 2 The goals of cash management are twofold: Plan cash receipts to meet cash payments when due. Keep a minimum level of cash necessary to operate. • Effective cash management involves applyingthe following cash management principles: • Encourage collection of receivables. • Delay payment of liabilities. • Keep only necessary levels of assets. • Plan expenditures. • Invest excess cash.
Control of Cash Disbursements P 1 • All expenditures should be made by check. The only exception is for small payments from petty cash. • Separate authorization for check signing and recordkeeping duties. • Use a voucher system.
Check Cashier Supplier (Vendor) Invoice Approval Accounting Cashier Accounting, Requesting& Purchasing Receiving Report Receiving Invoice Supplier (Vendor) Accounting Supplier, Requesting, Receiving & Accounting Purchase Order Purchasing Purchase Requisition Purchasing and Accounting Requesting Voucher Voucher System of Control P 1 Sender Receiver
Petty Cash Operating a Petty Cash Fund P 2 Petty Cashier CompanyCashier Accountant
Petty Cash Operating a Petty Cash Fund P 2 Petty Cashier
Operating a Petty Cash Fund P 2 Receipts $123 To reimburse petty cash fund Company Cashier Petty Cashier Use a Cash Over and Short account if needed. Accountant
Banking Activities as Controls C 3 Signature Cards Bank Accounts Deposit Tickets Checks Electronic Funds Transfer Bank Statements
Bank Reconciliation P 3 Two sections: • Reconcile bank statement balance to the adjusted bank balance. • Reconcile book balance to the adjusted book balance. The adjusted balances should be equal.
Days’ Sales Uncollected Accounts Receivable Net Sales = × 365 Days’ Sales Uncollected A 1 How much time is likely to pass before we receive cash receipts from credit sales.
