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Sarbanes-Oxley, Internal Control & Cash. ACG 2021: Chapter 7. Sarbanes-Oxley Act of 2002. This act is considered one of the most important and significant laws affecting publicly held companies in recent history. Publicly held companies –are those traded on public exchanges

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sarbanes oxley act of 2002
Sarbanes-Oxley Act of 2002
  • This act is considered one of the most important and significant laws affecting publicly held companies in recent history.
    • Publicly held companies –are those traded on public exchanges
  • Purpose is to restore public confidence and trust in the financial statements of companies.
  • Emphasizes the importance of internal control.
    • Internal Control – as the procedures and processes used by a company to safeguard its assets, process information accurately, and ensure compliance with laws and regulations.
  • Requires companies to maintain strong and effective internal controls over the recording of transactions and preparation of financial statements.
    • To deter fraud and prevent misleading financial statements.
  • Requires companies and their independent accountants to report on the effectiveness of the company’s internal controls
sarbanes oxley
Sarbanes Oxley
  • Caused by
    • Enron
    • Worldcom
    • Tyco
internal controls
Internal Controls
  • are the policies and procedures that:
    • protect assets from misuse,
    • ensure that business information is accurate,
    • ensure that laws and regulations are being followed
objectives of internal controls
Objectives of Internal Controls
  • Provides reasonable assurance that
    • Assets are safeguarded and used for business purposes
    • Business information is accurate
    • Employees comply with laws and regulations
  • Control environment
  • Risk assessment
  • Control procedures
  • Monitoring
  • Information and communication
control procedures
Control procedures
  • Competent personnel
  • Rotating duties
  • Mandatory vacations
  • Separating responsibilities
  • Separating operations
  • Proof and security measures
cash controls over receipts and payments
Cash – includes coins, currency, checks, money orders, and money on deposit

Businesses may have more than one cash account.

Operating account

Payroll account

Savings account

Cash Controls over Receipts and Payments
control of cash receipts
Control of Cash Receipts
  • To protect cash from theft and misuse, a business must control cash from the time it is received until it is deposited in a bank.
  • Two main sources of cash:
    • Customers purchasing products or services
    • Customers making payments on account
cash received from cash sales
Cash Received from Cash Sales:
  • Regardless of the source of cash receipts, every business must properly safeguard and record its cash receipts.
  • Cash registers help minimize risk
  • Change fund – amount in each drawer at the beginning of a shift.
cash in register
Cash in Register
  • Cash register
    • Change fund: monies at the start of the shift
    • At the end of the day, monies in the register may not equal what is should be
    • Short – too little – an expense to the business
    • Over – too much – revenue to the business
recording of difference
Recording of Difference
  • Cash short and over
    • New account
    • Classification depends on balance
    • Short => Debit = expense
    • Over => Credit = revenue
cash short and over
Cash Short and Over
  • Example: Cash sales show $2,000 and cash in drawer is $2,005.
cash short and over14
Cash short and Over
  • Example 2:: Suppose that cash sales are $3,500 and cash in drawer is $3,400.
cash short and over15
Cash short and Over
  • Cash short & Over



Results in expense



Results in revenue

cash control over receipts
Cash Control over Receipts
  • Cash Received by Mail:
    • Lock box
    • Cash controls
  • Cash Received by EFT:
    • EFT – electronic funds transfers
    • Most companies encourage automatic electronic transfers by customers
      • Term used in the auditor’s opinion of the internal control environment
  • Less costly
      • Enhance internal controls
control of cash payments
Control of Cash Payments
  • Control of cash payments should provide reasonable assurance that payments are made for only authorized transactions.
  • Voucher system
    • Set of procedures for authorizing and recording liabilities to pay cash or issue an electronic funds transfer.
  • Cash paid by EFT
    • Payroll systems
bank accounts and bank reconciliation
Bank Accountsand Bank Reconciliation
  • Bank accounts are used for control purposes
  • Reduces the amount of cash on hand at any one time
  • Provide independent recording of cash transactions
  • Facilitates the transfer of funds
  • Terminology:
    • Bank statement – a summary of transactions
      • Credit – increase in bank balance
        • ACH: automated clearing house entry for EFT
        • MS – miscellaneous credit
      • Debit – decrease in bank balance
        • NSF – not sufficient funds check
        • SC – service charge
        • ACH: automated clearing house entry for EFT
bank reconciliation
Bank Reconciliation
  • The reasons for the difference between the cash balance on the bank statement and the cash balance in the accounting records should be analyzed by preparing a bank reconciliation.
  • It 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.
bank reconciliation20
Bank Reconciliation
  • Steps in Bank Reconciliation:
    • Compare deposits on the bank statements with the ledger
      • Compare checks on the bank statements with the ledger
      • Add credit memo that have not been recorded to the balance according to the company’s records.
      • Deduct debit memo that have not been recorded form the balance according to the company’s records.
      • List any errors discovered during the preceding steps.



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



Deduct outstanding


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


Adjusted balance $2,630.99

Adjusted balance $2,630.99





Bank Reconciliation for Power Networking





Entry to Record Plus Items

July 31 Cash 408 00

Notes Receivable 400 00

Interest Income 8 00

Note collected by bank.



July 31 Cash 408 00

Notes Receivable 400 00

Interest Income 8 00

Note collected by bank.



Entry to Record Minus Items

31 Accounts Receivable—Thomas Ivey 300 00

Miscellaneous Expense 18 00

Accounts Payable—Taylor Co. 9 00

Cash 327 00

NSF check, bank service charges, and error in recording Check no. 879.


  • Deposit on July 31 not recorded on bank statement $816.20
  • Checks outstanding No 12 $1,061.00, No 8 $435.39, No 3 $48.60
  • Note plus interest of $8 collected by the bank $408.00
  • Check from customers return by bank because of insufficient funds $300.00
  • Bank service charge $18
  • Check No 23 recorded as $723.26 when it was actually $732.26.
  • Bank balance on statement $3359.78
  • Book balance per general ledger $2549.99
  • Do a bank reconciliation and prepare entries.
petty cash
Petty Cash
  • Fund for small cash expenses
    • Supplies
    • Postage
    • Food
    • Parking
  • Petty Cash is an asset account
petty cash entries
Petty Cash Entries
  • Establish the fund: Check written to petty cash for $500.
petty cash entries28
Petty Cash Entries
  • Reimburse the account
  • Example 1: Suppose that petty cash fund as the following receipts: office supplies $200, Miscellaneous $100, reimburse the account.