Chapter 6
Sarbanes-Oxley, Internal Control & Cash
Sarbanes-Oxley Act of 2002
 This act is considered one of the most important and significant laws
affecting publicly held companies in recent history.
o Publicly held companies –are those traded on public exchanges
 Purpose is to restore public confidence and trust in the financial
statements of companies.
 Emphasizes the importance of internal control.
o Internal Control – as the procedures and processes used by a
company to safeguard its assets, process information accurately,
and ensure compliance with laws and regulations.
 Requires companies to maintain strong and effective internal controls
over the recording of transactions and preparation of financial
statements.
o To deter fraud and prevent misleading financial statements.
 Requires companies and their independent accountants to report on
the effectiveness of the company’s internal controls.
Internal Controls
 are the policies and procedures that protect assets from misuse,
ensure that business information is accurate, and ensure that laws and
regulations are being followed.
Objectives of Internal Control
 Provides reasonable assurance that
o Assets are safeguarded and used for business
purposes
o Business information is accurate
o Employees comply with laws and regulations
Internal control can safeguard assets by preventing theft, fraud,
misuse, or misplacement.
Employee fraud -is the intentional act of deceiving an employer for
personal gain.
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Prepared by: Maria Mari
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Chapter 6
Sarbanes-Oxley, Internal Control & Cash
Elements of Internal Control
o The control environment – the overall attitude of
management and employees about the importance of
controls.
 -Influenced by management’s philosophy and
operating style.
 -Organizational structure – is the framework for
planning and controlling operations.
 -Personnel policies
o Risk assessment –
o Management should assess these risks and take
necessary actions to control them so that the
objectives of internal control can be achieved.
o Control procedures- established to provide reasonable
assurance those business goals will be achieved including
the prevention of fraud.
 Competent personnel
 Rotating duties
 Mandatory vacations
 Separating responsibilities for related
operations
 Separating operations, custody of assets, and
accounting
 Proofs and security measures
o Monitoring– locates weaknesses and improves control
effectiveness.
o the internal control system an be monitored through
either ongoing efforts by management or by separate
evaluations.
o Information and communication
o Information about the control environment, risk
assessment, control procedures, and monitoring is
needed by management to guide operations and
ensure compliance with reporting, legal, and
regulatory requirements.
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Chapter 6
Sarbanes-Oxley, Internal Control & Cash
Cash Controls over Receipts and Payments
o Cash – includes coins, currency, checks, money orders, and money on
deposit that is available for unrestricted withdrawal.
o Businesses may have more than one cash account.
o Operating account
o Payroll account
o Savings account
Control of Cash Receipts
o To protect cash from theft and misuse, a business must control cash
from the time it is received until it is deposited in a bank.
o Two main sources of cash:
o Customers purchasing products or services
o Customers making payments on account
o Cash Received from Cash Sales:
o Regardless of the source of cash receipts, every business must
properly safeguard and record its cash receipts.
o Cash registers help minimize risk
o Change fund – amount in each drawer at the beginning of a
shift.
o When you have a cash register – there could be small discrepancies
with the cash in the drawer and cash sales.
o Any differences are recorded in the Cash Short and Over account.
 Short – then debit the account (expense)
 Over – then credit the account (revenue)
Example: Cash sales show $2,000 and cash in drawer is $2,005.
Date
Account
Cash
Cash short and over
Sales
PR
Debit
Credit
$2,005
5
2,000
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Chapter 6
Sarbanes-Oxley, Internal Control & Cash
Example 1: Suppose that cash sales are $3,500 and cash in drawer is
$3,400.
Date
Account
PR
Debit
Credit
o Cash Received by Mail:
o Lock box
o Cash controls
o Cash Received by EFT:
o EFT – electronic funds transfers
o Most companies encourage automatic electronic transfers by
customers
 Less costly
Term used in the auditor’s
opinion of the internal
 Enhance internal controls
control environment
Control of Cash Payments
o Control of cash payments should provide reasonable assurance that
payments are made for only authorized transactions.
o Voucher system
o Set of procedures for authorizing and recording liabilities to pay
cash or issue an electronic funds transfer.
o Cash paid by EFT
o Payroll systems
Bank Accounts and Bank Reconciliation
o
o
o
o
o
Bank accounts are used for control purposes
Reduces the amount of cash on hand at any one time
Provide independent recording of cash transactions
Facilitates the transfer of funds
Terminology:
o Bank statement – a summary of transactions
 Credit – increase in bank balance
 ACH: automated clearing house entry for EFT
 MS – miscellaneous credit
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Chapter 6
Sarbanes-Oxley, Internal Control & Cash
 Debit – decrease in bank balance
 NSF – not sufficient funds check
 SC – service charge
 ACH: automated clearing house entry for EFT
Bank Reconciliation
o The reasons for the difference between the cash balance on the bank
statement and the cash balance in the accounting records should be
analyzed by preparing a bank reconciliation.
o It 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.
o Steps in Bank Reconciliation:
o Compare deposits on the bank statements with the ledger
o
o Compare checks on the bank statements with the ledger
o
o Add credit memo that have not been recorded to the balance
according to the company’s records.
o
o Deduct debit memo that have not been recorded form the
balance according to the company’s records.
o
o List any errors discovered during the preceding steps.
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What is
really in
the
bank
Chapter 6
Sarbanes-Oxley, Internal Control & Cash
King Company
Bank Reconciliation
July 31, 2007
Cash balance per books
Add: additions by bank not on books
Or depositors errors
$4,000 ending balance in cash account
100
4,100
Deduct: deductions by bank not on books
Such as service charges
Depositors error
Adjusted balance
50
4,050
Cash balance per bank statements
$3,950 ending balance on bank statement
Add: additions by depositor not on
Bank statement (outstanding deposits) 200
4,150
Deduct: deductions by bank not recorded
(Outstanding checks)
100
Adjusted balance
4,050
Example :
 Deposit on July 31 not recorded on bank statement $816.20
 Checks outstanding No 12 $1,061.00, No 8 $435.39, No 3
$48.60
 Note plus interest of $8 collected by the bank $408.00
 Check from customers return by bank because of insufficient
funds $300.00
 Bank service charge $18
 Check No 23 recorded as $723.26 when it was actually
$732.26.
 Bank balance on statement $3359.78
 Book balance per general ledger $2549.99
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Chapter 6
Sarbanes-Oxley, Internal Control & Cash
Nan Company
Bank Reconciliation
July 31, 2007
Bank statement balance
Add: outstanding deposits
$3,359.78
816.20
$4,175.98
Deduct: outstanding checks
No 12
8
3
Adjusted balance
$1,061.00
435.39
48.60
Book balance
Add: note and interest collected
$1,544.99
2,630.99
$2,549.99
408.00
2,957.99
Deduct: insufficient funds check
Service charge
Error on check
Adjusted balance
$300.00
18.00
9.00
327.00
$2,630.99
After the bank reconciliation is completed, any adjustments to
the BOOK BALANCE are recorded in the journal.
Date
Account
Cash
PR
Debit
Notes receivable
Interest income
Accounts receivable
Bank charge expense
Accounts payable
Cash
Credit
408.00
400
8
300
18
9
327.00
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Chapter 6
Sarbanes-Oxley, Internal Control & Cash
Petty Cash:
o small amounts of cash kept in the office for emergencies.
Entry to establish the account
Date
Account
Petty cash
Cash
PR
Debit
Credit
500
500
Entry to replenish the fund
Date
Account
Office supplies
Miscellaneous
expense
Cash
PR
Debit
Credit
200
100
300
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