Sarbanes-Oxley, Internal
Control and Cash
BY RACHELLE AGATHA, CPA, MBA
Slides by Rachelle Agatha, CPA,
with excerpts from Warren, Reeve, Duchac
Objectives:
1. Describe the Sarbanes-Oxley Act of
2002 and its impact on internal
controls and financial reporting.
2. Describe and illustrate the
objectives and elements of
internal control.
3. Describe and illustrate the
application of internal controls to
cash.
Objectives:
4. Describe the nature of a bank
account and its use in controlling
cash.
5. Describe and illustrate the use of a
bank reconciliation in controlling
cash.
6. Describe the accounting for
special-purpose cash funds.
Objectives:
7. Describe and illustrate the
reporting of cash and cash
equivalents in the financial
statements.
Objective 1
Describe the SarbanesOxley Act of 2002 and
its impact on internal
controls and financial
reporting.
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.
Sarbanes-Oxley requires
companies to maintain
strong and effective
internal control.
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.
Objective 2
Describe and illustrate
the objectives and
elements of internal
control.
Objectives of Internal Control
To provide reasonable assurance
that:
1) assets are safeguarded and used
for business purposes,
2) business information is
accurate, and
3) employees comply with laws
and regulations.
8-2
Employee fraud is
the intentional act of
deceiving an employer
for personal gain.
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—
1)
2)
3)
4)
5)
the control environment,
risk assessment,
control procedures,
monitoring, and
information and communication.
Control Environment
A business’s control
environment is the overall
attitude of management and
employees about the
importance of controls.
Factors That Influence the Control
Environment
 Management’s philosophy
and operating style
 The business’s
organizational structure
 Personnel policies
Control Environment
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.
 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.
Indicators of Internal Control Problems
Warning Signs With Regard to People
1. Abrupt change in lifestyle.
2. Close social relationships with
suppliers.
3. Refusing to take a vacation.
4. Frequent borrowing from other
employees.
5. Excessive use of alcohol or drugs.
Indicators of Internal Control Problems
Warning Signs from the Accounting System
1. Missing documents or gaps in
transaction numbers.
2. An unusual increase in customer
refunds.
3. Differences between daily cash
receipts and bank deposits.
4. Sudden increase in slow payments.
5. Backlog in recording transactions.
Objective 3
Describe and illustrate
the application of
internal controls to
cash.
Control of Cash Receipts
One of the most important
controls to protect cash
received in over-thecounter sales is a cash
register.
Change Fund
A predetermined amount of
money that is given to each
cash register clerk in a cash
drawer is called a change
fund.
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
Cash Short and Over
Sales
To record cash sales and
actual cash on hand.
3 142 00
8 00
3 150 00
Note that the shortage was debited to Cash Short
and Over.
Control of Cash Receipts
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.
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.
A voucher is any
document that serves as
proof of authority to
pay cash or issue an
electronic funds
transfer.
Objective 4
Describe the nature of a
bank account and its use
in controlling cash.
Use of Bank Accounts
A major reason that
businesses use bank
accounts is for control
purposes.
Bank accounts provide an
independent recording of cash
transactions that can be used as
a verification of the business’s
recording of transactions.
Bank Statement
A summary received from
the bank of all checking
account transaction is
called a bank
statement.
Bank Statement
Bank Statement
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.
The following items may appear on a bank
statement:
(1)
(2)
(3)
(4)
NSF check
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.
Item No.
Appears on the
Bank
Statement as a
Debit or Credit
Memorandum
Increases or
Decreases the
Balance of the
Depositor’s
Bank Account
(1)
Debit Memorandum
Decreases
(2)
Credit Memorandum
Increases
(3)
Debit Memorandum
Decreases
(4)
Debit Memorandum
Decreases
Power Networking’s Records
and Bank Statement
Power Networking
should determine the
reason for difference in
these two amounts.
Objective 5
Describe and illustrate
the use of a bank
reconciliation in
controlling cash.
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.
Bank Reconcilation
LOCK-IT CO.
Bank Reconciliation
31-Oct-08
Cash balance according to bank statement
Add: Deposit in transit on October 31
$ 8,600.50
13,690.45
22,290.95
7,115.35
$ 15,175.60
Deduct: Outstanding checks
Adjusted balance
Cash balance according to company's records
Add:
Error in recording Check No. 1007 as $4,715
instead of $4,175
Note for $5,000 collected by bank, including Interest
Deduct: Bank service charges
Adjusted balance
$ 9,305.60
540
5,375
5,915.00
15,220.60
45.00
$ 15,175.60
Bank’s records
Beginning balance
Company’s records
$3,359.78 Beginning balance
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.
$2,549.99
Bank’s records
Beginning balance
Add deposit not
recorded by bank
Company’s records
$3,359.78 Beginning balance
816.20
$4,175.98
A deposit of $816.20 did not
appear on the bank statement.
$2,549.99
Bank’s records
Beginning balance
Add deposit not
recorded by bank
Company’s records
$2,549.99
$3,359.78 Beginning balance
Add note and interest
816.20
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
Bank’s records
Beginning balance
Add deposit not
recorded by bank
Company’s records
$2,549.99
$3,359.78 Beginning balance
Add note and interest
816.20
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.
Bank’s records
Company’s records
$2,549.99
$3,359.78 Beginning balance
Add note and interest
816.20
collected by bank
408.00
$4,175.98
$2,957.99
Deduct outstanding
Deduct check
checks:
NSF
$300.00
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60 1,544.99
Beginning balance
Add deposit not
recorded by bank
The bank returned a check for $300 from customer
(Thomas Ivey) because of insufficient funds (NSF).
48
Bank’s records
Company’s records
$2,549.99
$3,359.78 Beginning balance
Add note and interest
816.20
collected by bank
408.00
$4,175.98
$2,957.99
Deduct outstanding
Deduct check
checks:
NSF
$300.00
No. 812
$1,061.00
Bank service
No. 878
435.39
charges
18.00
No. 883
48.60 1,544.99
Beginning balance
Add deposit not
recorded by bank
The bank service charges totaled $18.00.
Bank’s records
Company’s records
$2,549.99
$3,359.78 Beginning balance
Add note and interest
816.20
collected by bank
408.00
$4,175.98
$2,957.99
Deduct outstanding
Deduct check
checks:
NSF
$300.00
No. 812
$1,061.00
Bank service
No. 878
435.39
charges
18.00
No. 883
48.60 1,544.99
Error recording
Check No. 879 9.00 327.00
Beginning balance
Add deposit not
recorded by bank
Check No. 879 for $732.26 to Taylor Co. on account,
erroneously recorded in journal as $723.26.
Bank’s records
Company’s records
$2,549.99
$3,359.78 Beginning balance
Add note and interest
816.20
collected by bank
408.00
$4,175.98
$2,957.99
Deduct outstanding
Deduct check
checks:
NSF
$300.00
No. 812
$1,061.00
Bank service
No. 878
435.39
charges
18.00
No. 883
48.60 1,544.99
Error recording
Check No. 879 9.00 327.00
Adjusted balance
$2,630.99 Adjusted balance
$2,630.99
Beginning balance
Add deposit not
recorded by bank
51
Journal entries must be
prepared for those items
that affected the company’s
(depositor’s) side of the
reconciliation.
Company’s records
Beginning balance
Add note and interest
collected by bank
$2,549.99
408.00
$2,957.99
Deduct check
NSF
$300.00
Bank service
charges
18.00
Error recording
Check No. 879
9.00
327.00
Entry to Record Plus Items
July 31 Cash
Notes Receivable
Interest Income
Note collected by bank.
408 00
400 00
8 00
Company’s records
Beginning balance
Add note and interest
collected by bank
$2,549.99
408.00
$2,957.99
Deduct check
NSF
$300.00
Bank service
charges
18.00
Error recording
Check No. 879
9.00
327.00
Entry to Record Minus Items
July 31 Cash
Notes Receivable
Interest Income
Note collected by bank.
31 Accounts Receivable—Thomas Ivey
Miscellaneous Expense
Accounts Payable—Taylor Co.
Cash
NSF check, bank service
charges, and error in
recording Check no. 879.
408 00
400 00
8 00
300 00
18 00
9 00
327 00
The following data were gathered to
use in reconciling the bank account of
Photo Op.
Balance per bank
Balance per company records
Bank service charges
Deposit in transit
NSF check
Outstanding checks
$14,500
13,875
75
3,750
800
5,250
a. What is the adjusted balance on the
bank reconciliation?
b. Journalize any necessary entries for
Photo OP based upon the bank
reconciliation.
a. $13,000, as shown below.
Bank section of reconciliation: $14,500
– $5,250 + $3,750 = $13,000
Company section of reconciliation:
$13,875 – $75 – $800 = $13,000
b. Accounts Receivable
Miscellaneous Expense
Cash
800
75
875
Bank Reconcilation
LOCK-IT CO.
Bank Reconciliation
31-Oct-08
Cash balance according to bank statement
Add: Deposit in transit on October 31
$ 8,600.50
13,690.45
22,290.95
7,115.35
$ 15,175.60
Deduct: Outstanding checks
Adjusted balance
Cash balance according to company's records
Add:
Error in recording Check No. 1007 as $4,715
instead of $4,175
Note for $5,000 collected by bank, including Interest
Deduct: Bank service charges
Adjusted balance
$ 9,305.60
540
5,375
5,915.00
15,220.60
45.00
$ 15,175.60
Objective 6
Describe the
accounting for
special-purpose
cash funds.
It is usually not practical for a
business to write checks to pay
small amounts. Thus, it is
desirable to control such
payments by using a special
cash fund, called a petty
cash fund.
On August 1, issued Check No. 511 for $500 to
established a petty cash fund.
Page 9
JOURNAL
Date
2008
Description
Aug. 1 Petty Cash
Cash
Established petty cash
fund issuing Check 511.
Post.
Ref.
Debit
Credit
500 00
500 00
At the end of August, the petty cash receipts indicated
expenditures for the following items: office supplies, $380,
postage (office supplies), $22; store supplies, $35, and
miscellaneous administrative items, $30.
Aug. 31 Office Supplies
402 00
Store Supplies
35 00
Miscellaneous Administrative Exp.
Cash
Replenished petty cash fund.
30 00
467 00
Replenishing the petty cash
fund restores it to its original
amount of $500. Note that
there is no entry to Petty
Cash when the fund is
replenished.
Businesses often use special
cash funds to meet other
needs, such as payroll. Such
funds are called specialpurpose funds.
Prepare journal entries for each of the following;
a) Issued check to establish a petty cash fund of
$500.
b) The amount of cash in the petty cash fund is
currently $120. Issued a check to replenish the
fund, based on the following summary of petty
cash receipts: office supplies, $300 and
miscellaneous administrative expense, $75.
Record any missing funds in the cash short and
over account.
a) Petty Cash
Cash
500
b) Office Supplies
300
Miscellaneous Admin. Expense 75
Cash Short and Over
5
Cash
500
380
Objective 7
Describe and illustrate
the reporting of cash and
cash equivalents in the
financial statements.
A company’s excess cash is
normally invested in highly
liquid investments. These
investments are called cash
equivalents.
Companies that have
invested excess cash in
cash equivalents usually
report cash and cash
equivalents as one
amount on the balance
sheet.
Banks may require depositors
to maintain minimum cash
balances in their bank
accounts. Such a balance is
called a compensating
balance.
Summary
 Internal Controls & Cash
 Bank Reconcilations
 Petty Cash & Special Cash Funds
 Cash Equivalents