PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPAMcGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter 08CASH AND INTERNAL CONTROLS8 - 2INTERNAL CONTROL SYSTEMPolicies and procedures managers use to: Protect assets. Ensure reliable accounting. Promote efficient operations. Urge adherence to company policies. C18 - 3SARBANES-OXLEY ACT (SOX)The Sarbanes-Oxley Act requires managers and auditors of public companies to document and certify the system of internal controls. C1Section 404 of SOX requires that managers document and assess the effectiveness of all internal control processes that can impact financial reporting. Sen. Paul Sarbanes (D-MD)Rep. Mike Oxley (R-OH)8 - 4PRINCIPLES OF INTERNAL CONTROLInternal control principles common to all companies:1.Establish responsibilities.2.Maintain adequate records.3.Insure assets and bond key employees.4.Separate recordkeeping from custody of assets.5.Divide responsibility for related transactions.6.Apply technological controls.7.Perform regular and independent reviews.C18 - 5 TECHNOLOGY AND INTERNAL CONTROLReduced Processing ErrorsMore Extensive Testing of RecordsLimited Evidence of ProcessingCrucial Separation of DutiesIncreasedE-CommerceC18 - 6 LIMITATIONS OF INTERNAL CONTROLHuman ErrorNegligence Fatigue Misjudgment ConfusionHuman FraudIntent to defeat internal controls for personal gainC1Human fraud triple-threat: Opportunity, Pressure, and Rationalization.8 - 7 LIMITATIONS OF INTERNAL CONTROLThe costs of internal controls must not exceed their benefits.CostsBenefitsC18 - 8CONTROL OF CASHAn effective system of internal control that protects cash and cash equivalents should meet three basic guidelines:Handling cash is separated from recordkeeping for cash. Cash disbursements are made by check.C2Cash receipts are promptly deposited in a bank.8 - 9 CASH, CASH EQUIVALENTS, AND LIQUIDITYCash Currency, coins and amounts on deposit in bank accounts, checking accounts, and some savings accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders.Cash Equivalents Short-term, highly liquid investments that are: 1.Readily convertible to a known cash amount. 2.Close to maturity date and not sensitive to interest rate changes.C2Cash and similar assets are called liquid assets because they can be readily used to settle such obligations.8 - 10CASH MANAGEMENTThe goals of cash management are twofold:1.Plan cash receipts to meet cash payments when due.2.Keep a minimum level of cash necessary to operate.Effective cash management involves applying the following cash management principles: Encourage collection of receivables. Delay payment of liabilities. Keep only necessary levels of assets. Plan expenditures. Invest excess cash.C28 - 11 OVER-THE-COUNTER CASH RECEIPTSP1This graphic illustrates that none of the people involved can make a mistake or divert cash without the difference being revealed. 8 - 12 CASH OVER AND SHORTSometimes errors in making change are discovered from differences between the cash in the cash register and the record of the amount of cash receipts. P1If a cash registers record shows $550 but the count of cash in the register is $555, we would prepare the following journal entry:8 - 13CASH RECEIPTS BY MAILP1MailroomPreferably, two people are assigned the task of opening the mail. CashierThe cashier deposits the money in a bank. RecordkeeperThe recordkeeper records the amounts received in the accounting records.8 - 14 CONTROL OF CASH DISBURSEMENTSKeys to Controlling Cash Disbursementsq Require all expenditures to be made by check.qLimit access to checks except for those who have the authority to sign checks.P1Control of cash disbursements is especially important as most large thefts occur from payment of fictitious invoices.8 - 15VOUCHER SYSTEM OF CONTROLA voucher system establishes procedures for:1. Verifying, approving, and recording obligations for eventual cash disbursements.2. Issuing checks for payment of verified, approved, and recorded obligations.P18 - 16VOUCHER SYSTEM OF CONTROLP18 - 17PETTY CASH SYSTEM OF CONTROLSmall payments required in most companies for items such as postage, courier fees, repairs, and supplies.P28 - 18OPERATING A PETTY CASH FUNDPetty CashCompanyCompany CashierCashierP2AccountantAccountantPetty Petty CashierCashier8 - 19Petty CashPetty Petty CashierCashierOPERATING A PETTY CASH FUNDP28 - 20DeliveryPetty Petty CashierCashierA petty cash fund is used only for business expenses.OPERATING A PETTY CASH FUNDP2SuppliesServicesTransportation-in8 - 21OPERATING A PETTY CASH FUNDPetty cash receipts with either no signature or a forged signature usually indicate misuse of petty cash.Petty Petty CashierCashierP2DeliverySuppliesServicesTransportation-in8 - 22Company Comp