Chapter 2
Reporting and Analyzing Cash
and Internal Controls
Pr. SAMLAL Zoubida
Internal Control – All Policies and
Procedures Used to . . .
• Protect assets
• Ensure reliable accounting
• Promote efficient operations
• Urge adherence to company policies
Principles of Internal Control
• Establish responsibilities
• Maintain adequate records
• Insure assets and bond employees
Principles of Internal Control
• Separate recordkeeping and custody
over assets
• Divide responsibility for related
transactions
Principles of Internal Control
• Apply technological controls
• Perform regular and independent
reviews
Technology and Internal
Control
Reduced
Processing
Errors
Limited
Evidence of
Processing
More
Extensive Testing
of Records
Crucial
Separation of
Duties
Limitations of Internal
Control
Human Error
Human Fraud
Negligence
Fatigue
Misjudgment
Confusion
Intent to
defeat internal
controls for
personal gain
Limitations of Internal Control
The costs of internal controls
must not exceed their benefits.
Benefits
Costs
Cash, Cash Equivalents, and
Liquidity
• Cash
– Currency, coins and amounts on deposit in
bank account, checking accounts, and some
savings accounts.
Cash, Cash Equivalents, and
Liquidity
• Cash Equivalents are short-term, highly liquid
investments that are:
– Readily convertible to a known cash amount.
– Close to maturity date and not sensitive to
interest rate changes.
Cash, Cash Equivalents, and
Liquidity
• Liquidity
– How easily an asset can be converted into another
asset or be used in paying for services or
obligations.
Inventory
Cash
Control of Cash
• Segregate handling of cash from
recordkeeping of cash.
• Cash receipts are promptly (daily) deposited in
a bank.
• Cash disbursements are made by check.
Control of Cash Receipts
• Over-the-Counter Cash Receipts
– Cash register with locked-in record of
transactions.
– Compare cash register record with cash
reported.
Control of Cash Receipts
• Cash Receipts By Mail
– Two people open the mail.
• Money to cashier’s office
• List to accounting dept.
• Copy of list filed
Control of Cash Disbursements
• All expenditures made by check. The only
exception is for small payments from petty
cash.
• Separate authorization, check signing and
recordkeeping duties.
• Apply a voucher system.
A Voucher System of
Control
• Establishes procedures for:
– Accepting obligations resulting in cash
disbursements
– Verifying, approving and recording obligations
– Issuing checks for payment of verified, approved
and recorded obligations
A Voucher System of Control
• Establishes procedures for:
– Requiring obligations be recorded when incurred.
– Treating each purchase as an independent
transaction.
Voucher System of Control
Cashier’s Office
Accounting Dept.
Receiving Dept.
Supplier (Vendor)
Purchasing Dept.
Requesting Dept.
Check
Invoice Approval
Receiving Report
Invoice
Purchase Order
Purchase Requisition
Voucher
Supplier (Vendor)
Cashier’s Office
Accounting, Requesting,
Purchasing Depts.
Accounting Dept.
Supplier (Vendor)
Purchasing and
Accounting Depts.
Copy 2
Purchasing
Purchase Requisition
Clothes Mart
No. 1167
Purchase Requisition
Clothes Mart
Clothes
Mart
From:
Shoe Department
Request purchase of the following item(s):
Copy 1
From: Shoe Department
No. 1167
Purchase
Requisition
To: Purchasing
No. 1167
To: Purchasing
Description
Quantity
ABA32
Sandals -From:
black Shoe Department 25
Request purchaseTo:
of the
following item(s):
Purchasing
C1287
- white
25
ModelSandals
No. Description
Quantity
Model No.
Accounting
ABA32 Request
Sandals
- blackof the following item(s):
25
purchase
Reason forC1287
Request:
Refill
stock
Model
No. -Description
Sandals
white
Sandals - black
Approved
by: Andy
Taylor Sandals
Reason
for Request:
Refill stock
C1287
- white
ABA32
ApprovedReason
by: Andy
for Taylor
Request: Refill stock
Approved by: Andy Taylor
Requesting
Department
Quantity
25
25
25
One copy
of purchase
requisition
used to
prepare the
voucher.
Requesting Dept. Copy 3
Purchase Order
Accounting Copy 2
Clothes Mart Purchase Order No. M47 Vendor
Purchase Order
Nashville,
TN
Clothes
Mart
No. M47
To: Westcoast
Shoes
Purchase Order No. M47
Nashville,
TN
Clothes
Mart
35
PlaceShoes
To:Sunset
Westcoast
Nashville,
TN
Clothes
Mart
No. M47
San
Clemente,
90277
35 Sunset CA
Place
Copy 1
To: Westcoast Shoes
Nashville,
TN
San Clemente,
90277
35 SunsetCA
Place
Model No. DescriptionTo: Westcoast Shoes
Quantity Price
Amount
San Clemente, CA 90277
ABA32
Sandals
- black35 Sunset Place Quantity
25 $ 8.00
Model No.
Description
Price $ 200.00
Amount
90277
C1287
Sandals
-Description
white
ABA32
Sandals
- San
blackClemente, CA 25
25 8.00
$ 8.00
$ 200.00
Model
No.
Quantity
Price200.00
Amount
C1287
Sandals
- Description
white
25 25 8.00
ABA32
Sandals
- black
$ Price
8.00 200.00
$ 200.00
Model No.
Quantity
Amount
All shipments and invoices must include PO number
C1287
Sandals
- white
ABA32
Sandals
- black
All shipments and invoices must include PO number
C1287
Order by: B.T. Fife
Sandals - white
25 25 8.00
$ 8.00 200.00
$ 200.00
All shipments and invoices must include PO number
25
8.00
Order by: B.T. Fife
All shipments and invoices must include PO number
Order by: B.T. Fife
Order by: B.T. Fife
Retained in Purchasing
200.00
Clothes Mart
Nashville, Tennessee
Date: May 22, 2002
Pay to: Westcoast Shoes
City: San Clemente
Voucher No. 2718
State: CA
For the following:(attach all invoices and supporting documents)
Invoice Date Terms
05/18/02 2/10, n/30
05/28/02 2/10, n/30
Invoice No. and Details
Invoice 2718
Less discount
Net amount payable
Payment approval:
Bart Thurman
Auditor
Inside of a Voucher
Amount
$ 400.00
8.00
$ 392.00
Accounting Distribution
Account Debited
Merchandise inventory
Store supplies
Office supplies
Selling expense
General expene
Other:
Amount
392.00
Due date
Pay to: Westcoast Shoes
City: San Clemente
State: CA
Summary of charges:
Total charges
$ 400.00
Discount
8.00
Net payment
$ 392.00
Record of payment:
Voucher Payable Credit
392.00
Paid
Check No.
Outside of a Voucher
Petty Cash System of Control
• Small payments required in most
companies for items such as postage,
courier fees, repairs and supplies.
Operating a Petty Cash Fund
Petty Cashier
Treasurer and
Accountant
Petty Cashier
GENERAL JOURNAL
Date
May
Description
1 Petty Cash
Cash
Page 4
PR Debit Credit
400
400
Operating a Petty Cash Fund
Petty Cashier
Petty Cashier
Operating a Petty Cash Fund
Petty Cashier
Receipts
34¢
Stamps
Petty Cashier
34¢
Courier
Stamps
Courier
Operating a Petty Cash Fund
Receipts
$125
Treasurer and
Accountant
To reimburse
petty cash fund
GENERAL JOURNAL
Date
Description
May 15 Postage Expense
Courier Expense
Cash
Page 4
PR Debit Credit
45
80
125
Petty Cashier
We use a Cash
Over and Short
account if needed.
Petty Cash Example
• Tension Co. maintains a petty cash fund of $400. The
following summary information was taken from petty
cash vouchers for July:
–
–
–
–
Travel Expenses
Customer Business Lunches
Express Mail Postage
Miscellaneous Office Supplies
$79.30
93.42
55.00
32.48
• Let’s look at replenishing the fund if the balance on
July 31 was $137.80.
Petty Cash Example
• The journal entry to replenish the petty cash
fund is:
GENERAL JOURNAL
Date
Jul
Description
31 Travel Expense
PR
Page 8
Debit
79.30
Entertainment Expense
93.42
Postage Expense
55.00
Office Supplies Expense
32.48
Cash Over and Short
Cash
Credit
2.00
262.20
Accounting systems
Accounting system
 objective : satisfy taxation requirements and not the
financial control and management of the business.
 accounting software and the financial control provide an
early warning system but also indicates where management
action is required
 Accounting software can be a simple system of producing a
monthly profit and loss account and for many small
businesses that may be sufficient as the smaller the business
the more intimate knowledge the owner has of its finances.
 By using a financial accounting system to critically review
the business finances on a regular basis provides both
opportunities for sales growth and higher profit levels but
also serves as an early warning system of business problems.
Problems in accounting system



No care about transactions are not money
value
Conflict between accounting principles
Result declaration
Enterprise resource planning
(ERP)systems


It is to attempt to integrate several data
sources and processes of an organisation into
a unified system
It will use multiple components of computer
software and hardware to achieve the
integration
ERP
Disadvantages






Custamization is limited
It is very expensive
Integrated links need high accuracy to work effectively
Resistance insharing sensitive internal information between
departmentscan reduce the effectivenessof the software.
Large organizations may have multiple depardments with
seperate ,indepentent resources, missions and consolitation
into a single enterprisemay limited benefits
This may too complex measured against the actual needs of
the customer.
Constraints




Objective principle
Materiality principle
Consistancy principle
Prudent principle