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Sarbanes-Oxley, Internal Control , and Cash. Chapter 8. Learning Objectives. Describe the Sarbanes-Oxley Act of 2002 and its impact on internal controls and financial reporting. Describe and illustrate the objectives and elements of internal control.
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Learning Objectives • Describe the Sarbanes-Oxley Act of 2002 and its impact on internal controls and financial reporting. • Describe and illustrate the objectives and elements of internal control. • Describe and illustrate the application of internal controls to cash. • Describe the nature of a bank account and its use in controlling cash.
Learning Objectives (cont.) • Describe and illustrate the use of a bank reconciliation in controlling cash. • Describe the accounting for special-purpose cash funds. • Describe and illustrate the reporting of cash and cash equivalents in the financial statements. • 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.
Learning Objective 1 Describe the Sarbanes-Oxley Act of 2002 and its impact on internal controls and financial reporting.
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.
Sarbanes-Oxley Act of 2002 • Sarbanes-Oxley requires companies to maintain strong and effective internal controls over the recording of transactions and the preparing of financial statements.
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.
Learning Objective 2 Describe and illustrate the objectives and elements of internal control.
Internal Control • Employee fraud is the intentional act of deceiving an employer for personal gain.
Elements of Internal Control • Management is responsible for designing and applying five elements of internalcontrol to meet the three internal control objectives. These elements are as follows: • Control environment • Risk assessment • Control procedures • Monitoring • Information and communication
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 as follows: • Management’s philosophy and operating style • The company’s organizational structure • The company’s personnel policies
Control Procedures • Control procedures provide reasonable assurance that business goals will be achieved. Control procedures include the following: • Competent personnel, rotating duties, and mandatory vacations • Separating responsibilities for related operations • Separating operations, custody of assets, and accounting • Proofs and security measures
Monitoring • Monitoring the internal control system is used to locate weaknesses and improve controls.
Monitoring • Monitoring often includes observing employee behavior and the accounting system for indicators of control problems.
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 following factors: • The human element of controls • Cost-benefit considerations
Learning Objective 3 Describe and illustrate the application of internal controls to cash.
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.
Control of Cash Receipts • Businesses normally receive cash from two main sources: • Customers purchasing products or services • Customers making payments on account
Cash Received from Cash Sales • One of the most important controls to protect cash received in over-the-counter sales is a cash register.
Control of Cash Receipts • A predetermined amount of money that is given to each cash register clerk in a cash drawer is called a change fund.
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.
Cash Received from Cash Sales • 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 • If there had been cash over, Cash Short and Over would have been creditedfor the overage.
Cash Received in the Mail • 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.
Cash Received by EFT • 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.
Cash Received by EFT • Companies encourage customers to use EFT for the following reasons: • EFTs cost less than receiving cash payments through the mail. • EFTs enhance internal controls over cash since the cash is received directly by the bank without any employees handling cash. • EFTs reduce late payments from customers and speed up the processing of cash receipts.
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.
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.
Voucher System • A voucher is any document that serves as proof of authority to pay cash or issue an electronic funds transfer.
Learning Objective 4 Describe the nature of a bank account and its use in controlling cash.
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.
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.
Bank Statement • The following types of credit or debit memo entries are found on a bank statement:
Learning Objective 5 Describe and illustrate the use of a bank reconciliation in controlling cash.
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.
Bank Reconciliation • A bank reconciliation is usually divided into two sections as follows: • The bank section begins with the cash balance according to the bank statement and ends with the adjusted balance. • The company section begins with the cash balance according to the company’s records and ends with the adjusted balance.
