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Sarbanes-Oxley, Internal Control and Cash

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  1. 0 8 Sarbanes-Oxley, Internal Control and Cash

  2. 0 After studying this chapter, you should be able to: • 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.

  3. 0 After studying this chapter, you should be able to: • Describe the nature of a bank account and its use in controlling cash. • Describe and illustrate the use of a bank reconciliation in controlling cash. • Describe the accounting for special-purpose cash funds.

  4. 0 After studying this chapter, you should be able to: • Describe and illustrate the reporting of cash and cash equivalents in the financial statements.

  5. 0 8-1 Objective 1 Describe the Sarbanes-Oxley Act of 2002 and its impact on internal controls and financial reporting.

  6. 0 8-1 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.

  7. 0 8-1 Sarbanes-Oxley requires companies to maintain strong and effective internal control.

  8. 0 8-1 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.

  9. 0 8-1 Effect of Sarbanes-Oxley Act 9

  10. 0 8-2 Objective 2 Describe and illustrate the objectives and elements of internal control.

  11. 0 8-2 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.

  12. 0 8-2 Employee fraud is the intentional act of deceiving an employer for personal gain.

  13. 0 8-2 Five Elements of Internal Control 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.

  14. 0 8-2 14

  15. 0 8-2 Control Environment A business’scontrol environmentis the overall attitude of management and employees about the importance of controls.

  16. 0 8-2 Factors That Influence the Control Environment • Management’s philosophy and operating style • The business’s organizational structure • Personnel policies

  17. 0 8-2 Control Environment 17

  18. 0 8-2 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)

  19. 0 8-2 • 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)

  20. 0 8-2 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.

  21. 0 8-2 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.

  22. Example Exercise 8-1 0 8-2 - Identify each of the following as relating to (a) the control environment, (b) risk assessment, or (c) control procedures. • Mandatory vacations • Personnel policies • Report of outside consultants on future market changes 22

  23. Follow My Example 8-1 0 8-2 • (c) control procedures • (a) the control environment • (b) risk assessment 23 For Practice: PE 8-1A, PE 8-1B

  24. 0 8-3 Objective 3 Describe and illustrate the application of internal controls to cash.

  25. 0 8-3 Control of Cash Receipts One of the most important controls to protect cash received in over-the-counter sales is a cashregister.

  26. 0 8-3 Change Fund A predetermined amount of money that is given to each cash register clerk in a cash drawer is called a change fund.

  27. 0 8-3 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

  28. 0 8-3 Control of Cash Receipts 28

  29. 0 8-3 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.

  30. 0 8-3 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.

  31. 0 8-3 A voucheris any document that serves as proof of authority to pay cash or issue an electronic funds transfer.

  32. 0 8-4 Objective 4 Describe the nature of a bank account and its use in controlling cash.

  33. 0 8-4 Use of Bank Accounts A major reason that businesses use bank accounts is for control purposes.

  34. 0 8-4 Bankaccounts provide an independent recording of cash transactions that can be used as a verification of the business’s recording of transactions.

  35. 0 8-4 Bank Statement A summary received from the bank of all checking account transaction is called a bank statement.

  36. 0 8-4 Bank Statement 36 (Continued)

  37. 0 8-4 Bank Statement (Concluded) 37

  38. 0 8-4 Typical credit or debit memorandum entries found on the bank statement: EC — Error correction to correct bank error. NSF — Not sufficient funds check. SC — Service charge. ACH — Automated Clearing House entry for electronic funds transfer. MS — Miscellaneous items.

  39. Example Exercise 8-2 0 8-4 - The following items may appear on a bank statement: • (1) NSF check • (2) EFT Deposit • Service Charge • Bank correction of an error from recording a $400 check as $40. Indicate whether the item would appear as a debit or credit memorandum on the bank statement and whether the item would increase or decrease the balance of depositor’s account. 39

  40. Follow My Example 8-2 0 8-4 Appears on the Bank Statement as a Debit or Credit Memorandum Increases or Decreases the Balance of the Depositor’s Bank Account Item No. (1) Debit Memorandum Decreases (2) Credit Memorandum Increases (3) Debit Memorandum Decreases (4) Debit Memorandum Decreases 40 For Practice: PE 8-2A, PE 8-2B

  41. 0 8-4 Power Networking’s Records and Bank Statement Power Networking should determine the reason for difference in these two amounts. 41

  42. 0 8-5 Objective 5 Describe and illustrate the use of a bank reconciliation in controlling cash.

  43. 0 8-5 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.

  44. 0 8-5 Bank’s records Company’s records Beginning balance $2,549.99 Beginning balance $3,359.78 Power Network prepares to reconcile the monthly bank statement as of July 31. The bank statement shows an ending cash balance of $3,359.78. The company’s Cash account has a July 31 balance of $2,549.99. 44

  45. 0 8-5 Bank’s records Company’s records Beginning balance $2,549.99 Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.98 A deposit of $816.20 did not appear on the bank statement. 45

  46. 0 8-5 Bank’s records Company’s records Beginning balance $2,549.99 Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 $2,957.99 The bank collected a note in the amount of $400 and the related interest of $8 for Power Networking 46

  47. 0 8-5 Bank’s records Company’s records Beginning balance $2,549.99 Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Three checks that were written during the period did not appear on the bank statement: No. 812, $1,061; No. 878, $435.39, No. 883, $48.60. 47

  48. 0 8-5 Bank’s records Company’s records Beginning balance $2,549.99 Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Deduct check NSF $300.00 The bank returned a check for $300 from customer (Thomas Ivey) because of insufficient funds (NSF). 48

  49. 0 8-5 Bank’s records Company’s records Beginning balance $2,549.99 Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Deduct check NSF $300.00 Bank service charges 18.00 The bank service charges totaled $18.00. 49

  50. 0 8-5 Bank’s records Company’s records Beginning balance $2,549.99 Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Deduct check NSF $300.00 Bank service charges 18.00 Error recording Check No. 879 9.00 327.00 Check No. 879 for $732.26 to Taylor Co. on account, erroneously recorded in journal as $723.26. 50