Sarbanes-Oxley, Internal Control and Cash

1. 0 7 Sarbanes-Oxley, Internal Control and Cash

2. 0 7-1 The Sarbanes-Oxley Act of 2002 (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.

3. 0 7-1 Sarbanes-Oxley requires companies to maintain strong and effective internal control.

4. 0 7-1 Internal control is broadly defined as the procedures and processes used by a company to safeguard its assets, process information accurately, and ensure compliance with laws and regulations.

5. 0 7-2 Objectives of Internal Control To provide reasonable assurance that: • assets are safeguarded and used for business purposes, • business information is accurate, and • employees comply with laws and regulations.

6. 0 7-2 Employee fraud is the intentional act of deceiving an employer for personal gain.

7. 0 7-2 Management is responsible for designing and applying five elements of internal control to meet the three internal control objectives. These elements are— • the control environment, • risk assessment, • control procedures, • monitoring, and • information and communication.

8. 0 7-2 Control Environment A business’scontrol environmentis the overall attitude of management and employees about the importance of controls.

9. 0 7-2 Factors That Influence the Control Environment • Management’s philosophy and operating style • The business’s organizational structure • Personnel policies

10. 0 7-2 Example of control procedures for an all-night convenience store: • Locate the cash register near the door, so that it is fully visible from outside the store; have two employees work late hours; employ a security guard. • Deposit cash in the bank daily, before 5 p.m. (Continued)

11. 0 7-2 • Keep only small amounts of cash on hand after 5 p.m. by depositing excess cash in a store safe that can’t be opened by employees on duty. • Install cameras and alarm systems. (Concluded)

12. 0 7-2 Indicators of Internal Control Problems Warning Signs With Regard to People • Abrupt change in lifestyle. • Close social relationships with suppliers. • Refusing to take a vacation. • Frequent borrowing from other employees. • Excessive use of alcohol or drugs.

13. 0 7-2 Indicators of Internal Control Problems Warning Signs from the Accounting System • Missing documents or gaps in transaction numbers. • An unusual increase in customer refunds. • Differences between daily cash receipts and bank deposits. • Sudden increase in slow payments. • Backlog in recording transactions.

14. 0 7-3 Control of Cash Receipts One of the most important controls to protect cash received in over-the-counter sales is a cashregister.

15. 0 7-3 Change Fund A predetermined amount of money that is given to each cash register clerk in a cash drawer is called a change fund.

16. 0 7-3 Cash Short and Over Cash sales for March 19 totaled $3,150.00 per the cash register tape. After removing the change fund, only $3,142.00 was on hand. Mar 19 Cash 3 142 00 Cash Short and Over 8 00 Sales 3 150 00 To record cash sales and actual cash on hand. Note that the shortage was debited to Cash Short and Over. 27

17. 0 7-3 Electronic Funds Transfers Cash may be received from customers through electronic funds transfers. Customers may authorize automatic electronic transfers from their checking accounts to pay monthly bills.

18. 0 7-3 Control of Cash Payments—The 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.

19. 0 7-3 A voucheris any document that serves as proof of authority to pay cash or issue an electronic funds transfer.

20. 0 7-4 Use of Bank Accounts A major reason that businesses use bank accounts is for control purposes.

21. 0 7-4 Bankaccounts provide an independent recording of cash transactions that can be used as a verification of the business’s recording of transactions.

22. 0 7-4 Bank Statement A summary received from the bank of all checking account transaction is called a bank statement.

23. 0 7-5 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 in order to determine the adjusted cash balance.

24. Example Exercise 7-3 0 7-5 The following data were gathered to use in reconciling the bank account of Photo Op. Balance per bank $14,500 Balance per company records 13,875 Bank service charges 75 Deposit in transit 3,750 NSF check 800 Outstanding checks 5,250 58 What is the adjusted balance on the bank reconciliation?

25. 0 7-6 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.

26. Post. Ref. 0 7-6 On August 1, issued Check No. 511 for $500 to established a petty cash fund. JOURNAL Page 9 Date Description Debit Credit 2008 Aug. 1 Petty Cash 500 00 Cash 500 00 Established petty cash fund issuing Check 511. 63

27. 0 7-6 At the end of August, the petty cash receipts indicated expenditures for the following items: office supplies, $380, postage (office supplies), $22; store supplies, $35, and miscellaneous administrative items, $30. Aug. 31 Office Supplies 402 00 Store Supplies 35 00 Miscellaneous Administrative Exp. 30 00 Cash 467 00 Replenished petty cash fund. 64

28. 0 7-6 Replenishing the petty cash fund restores it to its original amount of $500. Note that there is no entry to Petty Cash when the fund is replenished.

29. 0 7-6 Businesses often use special cash funds to meet other needs, such as payroll. Such funds are called special-purpose funds.

30. 0 7-7 A company’s excess cash is normally invested in highly liquid investments. These investments are called cash equivalents.

31. 0 7-7 Companies that have invested excess cash in cash equivalents usually report cash andcash equivalents as one amount on the balance sheet.