Internal Control
and Cash
© Copyright Doug Hillman 2000
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Internal Control

Policies and procedures for protecting
assets from improper use
© Copyright Doug Hillman 2000
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Internal Control

Policies and procedures for protecting
assets from improper use and for the
detection and prevention of errors or
irregularities in accounting
© Copyright Doug Hillman 2000
3
Elements of the Internal
Control Structure
Control Environment
 Accounting System
 Control Procedures

© Copyright Doug Hillman 2000
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Control Environment
Management’s philosophy and operating
style
 Organizational structure
 Audit committee of board of directors
 Assigning authority and responsibility
 Controlling performance
 Policies and practices

© Copyright Doug Hillman 2000
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Accounting System
Identification and recording of all valid
transactions
 Proper classification of transactions
 Proper measurement of dollar amount
 Assignment to proper period
 Proper presentation in financial
statements and notes

© Copyright Doug Hillman 2000
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Control Procedures
Proper authorization of transactions and
activities
 Separation of duties
 Documents and records
 Safeguard over access to assets and
records
 Review of internal control system

© Copyright Doug Hillman 2000
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Cash
Deposits in checking and savings
accounts and any item bank customarily
accepts for immediate deposit
 Challenge is to control inflows and
outflows of cash

© Copyright Doug Hillman 2000
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Internal Control of Cash
Clear separation of duties and
responsibilities among those who handle
and account for cash
 Proper equipment
 Proper authorization for payment
 Organization of flow so that work of one
person checked by another
 Periodic testing of controls

© Copyright Doug Hillman 2000
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Petty Cash Fund
Special fund of cash used for small
payments
 Establishment
» Imprest amount debited to asset
account Petty Cash

© Copyright Doug Hillman 2000
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Petty Cash Fund
Expenditures
» No entry
» Evidenced by petty cash voucher
 Replenishment
» Check written to bring fund back to
imprest amount
» Record expenses evidenced by petty
cash vouchers

© Copyright Doug Hillman 2000
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Petty Cash Fund

Cash Over and Short
» When amount to replenish does not
equal vouchers
© Copyright Doug Hillman 2000
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Bank Checking Account
Monthly bank statement conceptually a
mirror image of company’s cash account
 Timing differences in recording of
deposits and clearing of checks causes
difference in balance between bank and
books.
 Requires reconciliation

© Copyright Doug Hillman 2000
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Bank Reconciliation
Uses a record of an independent
organization to prove the company’s
records
 Shows the items that account for the
difference between Cash account
balance and bank statement balance.

© Copyright Doug Hillman 2000
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Bank Reconciliation
Procedures
Compare deposits shown on bank
statement with debits to Cash
» Deposits late in period not on bank
statement are deposits in transit
 Compare checks clearing bank with
credits to Cash
» Checks not clearing bank are checks
outstanding

© Copyright Doug Hillman 2000
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Bank Reconciliation
Procedures
Compare bank debit and credit memos
to books to see if they have been
recorded
 List any errors as amounts are
compared

© Copyright Doug Hillman 2000
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Bank Reconciliation Per Books
Add increases in cash already recorded
by bank but not book
 Deduct decreases in cash already
recorded by bank but not book
 Add or deduct errors on books

© Copyright Doug Hillman 2000
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Bank Reconciliation Per Bank
Add increases in cash recorded on book
but not bank
» Deposits in transit
 Deduct decreases in cash already
recorded on books but not bank
» Checks outstanding
 Add or deduct errors by bank

© Copyright Doug Hillman 2000
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Bank Reconciliation
Journalize reconciling items from book
side not recorded
 Reconciliation not complete until all
items have cleared
 May take several months before we
know that a specific month’s adjusted
balance is in fact correct

© Copyright Doug Hillman 2000
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Analyzing Information
Is balance higher or lower than previous
year?
 What restrictions exist on cash?
» Compensating balances
 Where is cash invested?

© Copyright Doug Hillman 2000
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Comprehensive Analysis
Case: Income Statement
Are total revenues higher or lower?
 What is percent change in revenues?
 Is percent of cost of goods sold to total
revenues increasing or decreasing?
 Is percent of total operating expenses to
total revenues increasing or decreasing?
 Is percent of net income to total
revenues increasing or decreasing?

© Copyright Doug Hillman 2000
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Comprehensive Analysis
Case: Balance Sheet
Are total assets higher or lower?
 What is percent change in total assets?
 What are largest asset investments?
 Are largest asset investments increasing
faster or slower than percent change in
total revenues?
 Is percent total liabilities to total liabilities
plus owners’ equity increasing or
decreasing?

© Copyright Doug Hillman 2000
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Comprehensive Analysis
Case: Integrative
Is the company operating more or less
efficiently using the least amount of
assets to generate a given level of total
revenues
 Compute total asset turnover

© Copyright Doug Hillman 2000
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Comp. Analysis Case: Shortterm Liquidity Ratios
Current ratio
 Quick ratio
 Accounts receivable turnover
 Inventory turnover
 Is ration better or worse than previous
year?

© Copyright Doug Hillman 2000
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Comp. Analysis Case:
Profitability Ratio
Return on total assets
» Profit margin
» Total asset turnover
 Is ROA better or worse than prior years?

© Copyright Doug Hillman 2000
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