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Chapter 2 Reporting and Analyzing Cash and Internal Controls

Chapter 2 Reporting and Analyzing Cash and Internal Controls. Pr. SAMLAL Zoubida. Internal Control – All Policies and Procedures Used to. Protect assets Ensure reliable accounting Promote efficient operations Urge adherence to company policies. Principles of Internal Control.

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Chapter 2 Reporting and Analyzing Cash and Internal Controls

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  1. Chapter 2 Reporting and Analyzing Cash and Internal Controls Pr. SAMLAL Zoubida

  2. Internal Control – All Policies and Procedures Used to . . . • Protect assets • Ensure reliable accounting • Promote efficient operations • Urge adherence to company policies

  3. Principles of Internal Control • Establish responsibilities • Maintain adequate records • Insure assets and bond employees

  4. Principles of Internal Control • Separate recordkeeping and custody over assets • Divide responsibility for related transactions

  5. Principles of Internal Control • Apply technological controls • Perform regular and independent reviews

  6. Technology and Internal Control Reduced Processing Errors More Extensive Testing of Records Limited Evidence of Processing Crucial Separation of Duties

  7. Human Fraud Human Error Negligence Fatigue Misjudgment Confusion Intent to defeat internal controls for personal gain Limitations of Internal Control

  8. Limitations of Internal Control The costs of internal controls must not exceed their benefits. Benefits Costs

  9. Cash, Cash Equivalents, and Liquidity • Cash • Currency, coins and amounts on deposit in bank account, checking accounts, and some savings accounts.

  10. Cash, Cash Equivalents, and Liquidity • Cash Equivalents are 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.

  11. Cash, Cash Equivalents, and Liquidity • Liquidity • How easily an asset can be converted into another asset or be used in paying for services or obligations. Inventory Cash

  12. Control of Cash • Segregate handling of cash from recordkeeping of cash. • Cash receipts are promptly (daily) deposited in a bank. • Cash disbursements are made by check.

  13. Control of Cash Receipts • Over-the-Counter Cash Receipts • Cash register with locked-in record of transactions. • Compare cash register record with cash reported.

  14. Control of Cash Receipts • Cash Receipts By Mail • Two people open the mail. • Money to cashier’s office • List to accounting dept. • Copy of list filed

  15. Control of Cash Disbursements • All expenditures made by check. The only exception is for small payments from petty cash. • Separate authorization, check signing and recordkeeping duties. • Apply a voucher system.

  16. A Voucher System of Control • Establishes procedures for: • Accepting obligations resulting in cash disbursements • Verifying, approving and recording obligations • Issuing checks for payment of verified, approved and recorded obligations

  17. A Voucher System of Control • Establishes procedures for: • Requiring obligations be recorded when incurred. • Treating each purchase as an independent transaction.

  18. Check Invoice Approval Receiving Report Invoice Purchase Order Purchase Requisition Voucher Voucher System of Control Cashier’s Office Supplier (Vendor) Accounting Dept. Cashier’s Office Accounting, Requesting, Purchasing Depts. Receiving Dept. Supplier (Vendor) Accounting Dept. Purchasing Dept. Supplier (Vendor) Purchasing and Accounting Depts. Requesting Dept.

  19. Copy 2 Purchasing Copy 1 Accounting One copy of purchase requisition used to prepare the voucher. Requesting Department

  20. Requesting Dept. Copy 3 Copy 2 Accounting Copy 1 Vendor Retained in Purchasing

  21. Inside of a Voucher

  22. Outside of a Voucher

  23. Petty Cash System of Control • Small payments required in most companies for items such as postage, courier fees, repairs and supplies.

  24. Petty Cashier Operating a Petty Cash Fund Treasurer and Accountant Petty Cashier

  25. Petty Cashier Operating a Petty Cash Fund Petty Cashier

  26. 34¢ 34¢ Stamps Stamps Courier Courier Operating a Petty Cash Fund Receipts Petty Cashier Petty Cashier

  27. Operating a Petty Cash Fund Receipts $125 To reimburse petty cash fund Treasurer and Accountant Petty Cashier We use a Cash Over and Short account if needed.

  28. Petty Cash Example • Tension Co. maintains a petty cash fund of $400. The following summary information was taken from petty cash vouchers for July: • Travel Expenses $79.30 • Customer Business Lunches 93.42 • Express Mail Postage 55.00 • Miscellaneous Office Supplies 32.48 • Let’s look at replenishing the fund if the balance on July 31 was $137.80.

  29. Petty Cash Example • The journal entry to replenish the petty cash fund is:

  30. Accounting systems

  31. Accounting system • objective : satisfy taxation requirements and not the financial control and management of the business. • accounting software and the financial control provide an early warning system but also indicates where management action is required • Accounting software can be a simple system of producing a monthly profit and loss account and for many small businesses that may be sufficient as the smaller the business the more intimate knowledge the owner has of its finances. • By using a financial accounting system to critically review the business finances on a regular basis provides both opportunities for sales growth and higher profit levels but also serves as an early warning system of business problems.

  32. Problems in accounting system • No care about transactions are not money value • Conflict between accounting principles • Result declaration

  33. Enterprise resource planning (ERP)systems • It is to attempt to integrate several data sources and processes of an organisation into a unified system • It will use multiple components of computer software and hardware to achieve the integration

  34. ERP

  35. Disadvantages • Custamization is limited • It is very expensive • Integrated links need high accuracy to work effectively • Resistance insharing sensitive internal information between departmentscan reduce the effectivenessof the software. • Large organizations may have multiple depardments with seperate ,indepentent resources, missions and consolitation into a single enterprisemay limited benefits • This may too complex measured against the actual needs of the customer.

  36. Constraints • Objective principle • Materiality principle • Consistancy principle • Prudent principle

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