Chapter 08

CASH AND INTERNAL

CONTROLS

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., CPA

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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C1

INTERNAL CONTROL SYSTEM

Policies and procedures managers use to:

 Protect assets.
 Ensure reliable accounting.
 Promote efficient operations.
 Urge adherence to company policies.
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C1
SARBANES-OXLEY ACT (SOX)
The Sarbanes-Oxley Act requires managers and auditors of
public companies to document and certify the system of internal
controls.

Sen. Paul Sarbanes Rep. Mike Oxley

(D-MD) (R-OH)

Section 404 of SOX requires that managers document and

assess the effectiveness of all internal control processes that
can impact financial reporting.
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C1

PRINCIPLES OF INTERNAL CONTROL

Internal 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.
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C1 TECHNOLOGY AND INTERNAL

CONTROL

Reduced More
Processing Extensive Testing
Errors of Records

Limited Crucial
Evidence of Separation of
Processing Duties

Increased
E-Commerce
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C1 LIMITATIONS OF INTERNAL
CONTROL
Human Error Human Fraud

Negligence Intent to
Fatigue defeat internal
Misjudgment controls for
Confusion personal gain

Human fraud triple-threat:

Opportunity, Pressure, and Rationalization.
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C1 LIMITATIONS OF INTERNAL
CONTROL

The costs of internal controls

must not exceed their benefits.

Benefits
Costs
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C2

CONTROL OF CASH
An effective system of internal control that
protects cash and cash equivalents should meet
three basic guidelines:

Handling cash Cash receipts

is separated from are promptly
recordkeeping for deposited in a
cash. bank.
Cash
disbursements
are made by
check.
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C2 CASH, CASH EQUIVALENTS,

AND LIQUIDITY
Cash and similar assets are called liquid assets because
they can be readily used to settle such obligations.
Cash
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.
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C2

CASH MANAGEMENT
The 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.
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P1 OVER-THE-COUNTER CASH
RECEIPTS
This graphic illustrates that none of the people
involved can make a mistake or divert cash
without the difference being revealed.
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P1 CASH OVER AND SHORT

Sometimes errors in making change are discovered from
differences between the cash in the cash register and the
record of the amount of cash receipts.

If a cash register’s record shows $550 but the count of cash in

the register is $555, we would prepare the following journal
entry:
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P1

CASH RECEIPTS BY MAIL

The
Preferably, two recordkeeper
The cashier
people are records the
deposits the
assigned the amounts
money in a
task of opening received in the
bank.
the mail. accounting
records.

Mailroom Cashier Recordkeeper

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P1 CONTROL OF CASH
DISBURSEMENTS

Control of cash disbursements is

especially important as most
large thefts occur from payment
of fictitious invoices.

Keys to Controlling Cash Disbursements

 Require all expenditures to be made by check.
 Limit access to checks except for those who have
the authority to sign checks.
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P1

VOUCHER SYSTEM OF CONTROL

AA voucher
voucher system
system establishes
establishes procedures
procedures
for:
for:
1.
1. Verifying,
Verifying, approving,
approving, and
and recording
recording
obligations
obligations for
for eventual
eventual cash
cash disbursements.
disbursements.
2.
2. Issuing
Issuing checks
checks for
for payment
payment of
of verified,
verified,
approved,
approved, and
and recorded
recorded obligations.
obligations.
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P1

VOUCHER SYSTEM OF CONTROL

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P2

PETTY CASH SYSTEM OF CONTROL

Small
Small payments
payments required
required in
in most
most companies
companies
for
for items
items such
such as
as postage,
postage, courier
courier fees,
fees,
repairs,
repairs, and
and supplies.
supplies.
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P2

OPERATING A PETTY CASH FUND

Petty Cash

Company Petty
Cashier Cashier

Accountant
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P2

OPERATING A PETTY CASH FUND

Petty
Cashier
Petty Cash
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P2

OPERATING A PETTY CASH FUND

A petty cash fund is

used only for
business expenses. Petty
Cashier

Transportation-in Services Supplies Delivery

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P2

OPERATING A PETTY CASH FUND

Petty
Cashier

Petty cash receipts

with either no signature
or a forged signature
usually indicate misuse Transportation-in Services Supplies Delivery
of petty cash.
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P2

OPERATING A PETTY CASH FUND

$71.30

To reimburse
Company Petty
petty cash fund
Cashier Cashier

Accountant
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BASIC BANK SERVICES

Bank Accounts Signature Cards Deposit Tickets

Electronic Bank
Checks
Funds Transfer Statements
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BANK STATEMENT
C2

Usually once a month, the

bank sends each depositor a
bank statement showing the
activity in the account.
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P3

BANK RECONCILIATION
A bank reconciliation is prepared periodically to explain
the difference between cash reported on the bank
statement and the cash balance on company’s books.
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P3
BANK RECONCILIATION
The balance of a checking account reported on
the bank statement rarely equals the balance in
the depositor’s accounting records.

Cash Balance per Bank Cash Balance per Book

+ Deposits in Transit + Collections & Interest

- Outstanding Checks - Uncollectible items

+/- Errors +/- Errors

Adjusted Cash Balance Adjusted Cash Balance

=
Adjusting entries are recorded for the reconciling items on
the book side of the reconciliation.
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P3 ILLUSTRATION OF A BANK
RECONCILIATION
We follow nine steps in preparing the
bank reconciliation.
Cash Balance per Bank

+ Deposits in Transit

- Outstanding Checks

+/- Errors

Adjusted Cash Balance

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P3 ILLUSTRATION OF A BANK
RECONCILIATION
We follow nine steps in preparing the
bank reconciliation.
Cash Balance per Book

+ Collections & Interest

- Uncollectible items

+/- Errors

Adjusted Cash Balance

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P3 ILLUSTRATION OF A BANK
RECONCILIATION
We follow nine steps in preparing the
bank reconciliation.

Adjusting entries are recorded for the reconciling

items on the book side of the reconciliation.
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P3 ILLUSTRATION OF A BANK
RECONCILIATION
Only the items reconciling the book balance
require adjustment.
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GLOBAL VIEW
Internal Control Purposes, Principles and Procedures
The purposes and principles of internal control systems are
fundamentally the same across the globe.

Control of Cash
Accounting definitions for cash are similar for U.S. GAAP and
IFRS.

Banking Activities as Controls

There is a global demand for banking services, bank statements,
and bank reconciliations. To the extent feasible, companies utilize
banking services as part of their effective control procedures.
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A1

DAYS’ SALES UNCOLLECTED

Indicates
Indicates how
how much
much time
time is
is likely
likely to
to pass
pass before
before
we
we receive
receive cash
cash receipts
receipts from
from credit
credit sales.
sales.

Days’
Accounts Receivable
Sales = × 365
Net Sales
Uncollected

$612,000,000
56 days = × 365
$4,022,000,000
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P4
APPENDIX 8A:
DOCUMENTATION AND
VERIFICATION

Purchase Requisition

Purchase Order

Invoice
Voucher
Receiving Report
 APPENDIX 8B:
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P5
CONTROL OF PURCHASE
DISCOUNTS
The net method gives management an advantage in
controlling and monitoring cash payments involving
purchase discounts.

When purchases are

recorded at net amounts,
a Discounts Lost expense
account is recorded and
brought to management’s
attention.
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END OF CHAPTER