Chapter 6
Acct 2210:
Internal Control
and Accounting
for Cash
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
LO 1
Identify the key
elements of a
strong system of
internal control.
6-1
Internal Controls
Internal Controls (policies/procedures
to provide assurance that enterprise
objectives are accomplished)
(1)
Accounting
controls designed
to safeguard company
assets and ensure
reliable accounting
records
(2)
Administrative
controls for
evaluating
performance and
assessing compliance
with company policies
and public laws
6-2
The Nine (9) Features of
Internal Control (pg 315-317)
1.
2.
3.
4.
5.
6.
7.
8.
9.
Separation of Duties
Quality of Employees
Bonded Employees
Required Absences
Procedures Manual
Authority and Responsibility
Prenumbered Documents
Physical Control
Performance Evaluations
6-3
1) Separation of Duties
When duties are separated, the work of one
employee can act as a check on the work of
another employee. The likelihood of fraud or theft
is greatly reduced.
6-4
2) Quality of Employees
The ability of cross-trained employees to substitute
for one another prevents disruptions in the
workplace. Job rotation may help relieve boredom
and increase productivity.
6-5
3) Bonded Employees
A fidelity bond provides insurance that protects a
company from loss caused by employee
dishonesty. To become bonded, an employee’s
background is investigated.
6-6
4) Required Absences
An employee may be able to cover up
fraudulent activities if they are always present
at work. All employees should be required to
take regular vacations and their duties should
be rotated periodically.
6-7
5) Procedures Manual
Accounting and other important procedures should be
written in a procedures manual. Periodically,
management should conduct an investigation to see
that required procedures are actually being followed.
6-8
6) Authority and Responsibility
General authority applies to all member of the
organization. For example, all employees are required
to fly coach and purchase airline tickets from a
specific vendor.
Specific authority applies only to a specific position
within the organization. For example, all checks must
be cosigned by the Controller and Treasurer.
6-9
7) Prenumbered Documents.
Prenumbered forms are used for all important
documents such as checks, purchase orders, receiving
reports, and invoices. The use of prenumbered forms
helps keep track of all forms issued during a particular
period.
6-10
8) Physical Control
All companies should maintain adequate physical
control over valuable assets that may be
misappropriated. For example, inventory should be
properly stored in a secure location. Serial numbers
should be placed on all valuable assets to assist in a
physical count of these assets.
6-11
9) Performance Evaluation
Internal controls should include independent verification
of employee performance.
For example, someone other than the person who has
control over inventory should take a physical count of
inventory.
Internal and external audits serve as independent
verification of performance.
6-12
Internal Control Limitations!
Internal controls can be circumvented by
collusion among employees. Two or more
employees working together can hide
embezzlement by covering for each other. No
system can completely prevent fraud.
6-13
LO 2
Identify special
internal controls
for cash.
6-14
Accounting for Cash
Up to date signature
card should be
maintained.
A monthly bank
reconciliation should
be prepared by an
independent party.
Cash receipts should
be recorded
immediately upon
receipt and deposited
intact daily.
Controlling
Cash
A deposit ticket
should be used for
all deposits.
Cash payments should
be made by
prenumbered check.
6-15
LO 3
Prepare a bank
reconciliation.
6-16
Reconciling the Bank Statement
The bank reconciliation reports on the differences
between the balance on the bank statement and the
balance in the general ledger cash account. The
reconciliation results in the true cash balance that
will appear on the balance sheet.
Adjustment to the Bank Balance
Unadjusted bank balance
+ Deposits in transit
Deduct - Outstanding checks
Equals = True cash balance
Add
Adjustments to the Book Balance
Unadjusted book balance
Add + Accounts receivable collections
+
Deduct Deduct Equals =
Add
Interest earned
Bank service charges
Non-sufficient funds (NSF) check
True cash balance
6-17
Reconciling the Bank Statement
If an error is found on the bank statement, an
adjustment for it is made to the unadjusted
bank balance to determine the “true” cash
balance. Any error or change made on our
books requires an adjusting journal entry to
correct.
6-18
Bank Reconciliation
Green Shades Resorts, Inc. is preparing the bank reconciliation for
the month of September.
1. The Sept 30th balance on the bank statement is $3,516.45,
and the Cash general ledger balance on this date is $3,361.22
.
2. There was a deposit in transit in the amount of $724.11.
3. The bank erroneously deducted a $25 check drawn on the
books of Green Valley Resorts from our account.
4. At September 30th three checks are outstanding. Check 639
dated 9/18 for $13.75; Check 646 dated 9/20 for $29.00; and
Check 672 dated 9/27 for $192.50 .
More Information
6-19
Bank Reconciliation
5. During the month of September the bank collected an
account receivable for us in the amount of $940.00 .
6. A check actually written for $36.45 for utilities expense
was erroneously recorded in our records by the
bookkeeper as $63.45.
7. The bank assessed a service charge of $8.40 for
September.
8. We deposited a NSF check in the amount of $289.51 .
Let’s prepare the bank reconciliation
6-20
Bank Reconciliation
Green Shades Resorts, Inc.
Bank Reconciliation Statement
September 30, 2013
Unadjusted Bank Balance, September 30
$ 3,516.45
Add: Deposits in transit
724.11
Bank error: Check drawn on GVRI charged to GSRI
25.00
Less: Outstanding checks
Check No. 639 - September 18
13.75
Check No. 646 - September 20
29.00
Check No. 672 - September 27
192.50
(235.25)
True Cash balance, June 30
$ 4,030.31
Unadjusted Book Balance, September 30
Add: Receivable collected by bank
Error: Check 633 recorded as 63.45 not 36.45
Less: Bank service charge
NSF Check
True Cash balance, June 30
$ 3,361.22
940.00
27.00
(8.40)
(89.51)
$ 4,230.31
6-21
Bank Reconciliation
Green Shades Resorts, Inc.
Bank Reconciliation Statement
September 30, 2013
Unadjusted Bank Balance, September 30
$ 3,516.45
Add: Deposits in transit
724.11
Bank error: Check drawn on GVRI charged to GSRI
25.00
Less: Outstanding checks
Check No. 639 - September 18
13.75
Check No. 646 - September 20
29.00
Check No. 672 - September 27
192.50
(235.25)
True Cash balance, June 30
$ 4,030.31
Unadjusted Book Balance, September 30
Add: Receivable collected by bank
Error: Check 633 recorded as 63.45 not 36.45
Less: Bank service charge
NSF Check
True Cash balance, June 30
$ 3,361.22
940.00
27.00
(8.40)
(89.51)
$ 4,230.31
6-22
Bank Reconciliation
Green Shades Resorts, Inc.
Bank Reconciliation Statement
September 30, 2013
Unadjusted Bank Balance, September 30
$ 3,516.45
Add: Deposits in transit
724.11
Bank error: Check drawn on GVRI charged to GSRI
25.00
Less: Outstanding checks
Check No. 639 - September 18
13.75
Check No. 646 - September 20
29.00
Check No. 672 - September 27
192.50
(235.25)
True Cash balance, September 30
$ 4,030.31
Unadjusted Book Balance, September 30
Add: Receivable collected by bank
Error: Check 633 recorded as 63.45 not 36.45
Less: Bank service charge
NSF Check
True Cash balance, June 30
$ 3,361.22
940.00
27.00
(8.40)
(89.51)
$ 4,230.31
6-23
Bank Reconciliation
Green Shades Resorts, Inc.
Bank Reconciliation Statement
September 30, 2013
Unadjusted Bank Balance, September 30
$ 3,516.45
Add: Deposits in transit
724.11
Bank error: Check drawn on GVRI charged to GSRI
25.00
Less: Outstanding checks
Check No. 639 - September 18
13.75
Check No. 646 - September 20
29.00
Check No. 672 - September 27
192.50
(235.25)
True Cash balance, September 30
$ 4,030.31
Unadjusted Book Balance, September 30
Add: Receivable collected by bank
Error: Check 633 recorded as 63.45 not 36.45
Less: Bank service charge
NSF Check
True Cash balance, June 30
$ 3,361.22
940.00
27.00
(8.40)
(89.51)
$ 4,230.31
6-24
Bank Reconciliation
Green Shades Resorts, Inc.
Bank Reconciliation Statement
September 30, 2013
Unadjusted Bank Balance, September 30
$ 3,516.45
Add: Deposits in transit
724.11
Bank error: Check drawn on GVRI charged to GSRI
25.00
Less: Outstanding checks
Check No. 639 - September 18
13.75
Check No. 646 - September 20
29.00
Check No. 672 - September 27
192.50
(235.25)
True Cash balance, September 30
$ 4,030.31
Unadjusted Book Balance, September 30
Add: Receivable collected by bank
Error: Check 633 recorded as $63.45 not $36.45
Less: Bank service charge
NSF Check
True Cash balance, June 30
$ 3,361.22
940.00
27.00
(8.40)
(89.51)
$ 4,230.31
6-25
Bank Reconciliation
Green Shades Resorts, Inc.
Bank Reconciliation Statement
September 30, 2013
Unadjusted Bank Balance, September 30
$ 3,516.45
Add: Deposits in transit
724.11
Bank error: Check drawn on GVRI charged to GSRI
25.00
Less: Outstanding checks
Check No. 639 - September 18
13.75
Check No. 646 - September 20
29.00
Check No. 672 - September 27
192.50
(235.25)
True Cash balance, September 30
$ 4,030.31
Unadjusted Book Balance, September 30
Add: Receivable collected by bank
Error: Check 633 recorded as $63.45 not $36.45
Less: Bank service charge
NSF Check
True Cash balance, September 30
$ 3,361.22
940.00
27.00
(8.40)
(289.51)
$ 4,030.31
6-26
Adjusting the Books (Only)
Every reconciling item that appears on the unadjusted
book balance section requires a journal entry to adjust
the general ledger cash balance to the true cash balance.
Account Title
Cash
Accounts Receivable
Utilities Expense
Bank Service Charge Eexpense
Accounts Receivable
Cash
Debit
967.00
Credit
940.00
27.00
8.40
289.51
297.91
6-27
Cash Short and Over
When using a cash register, employees
sometimes make mistakes in collecting cash or
making change for customers. If the cash register
does not reconcile by a small amount at the end
of the day, we use an account called Cash Short
and Over to force a balance.
Assume a cash
register was to have
a balance of $500,
but contained only
$499 at the end of
the day.
Account Title
Cash
Cash Short and Over
Sales
Debit
499.00
1.00
Credit
500.00
6-28
LO 5
Describe the
auditor’s role in
financial
reporting.
6-29
The Financial Analyst
How can a
financial
analyst know
that a
company
really did
follow GAAP?
Certified Public Accountants
6-30
Materiality and Financial Audits
Auditors do not guarantee that financial
statements are absolutely correct—only
that they are materially correct.
“Material” Item
An error, or other
reporting problem, that
would influence the
decision of an average
prudent investor.
6-31
Types of Audit Opinions
Unqualified
Qualified
Adverse
Disclaimer
6-32
Confidentiality
• The confidentiality rules in the code of
ethics for CPAs prohibits auditors from
voluntarily disclosing information they
have acquired as a result of their
accountant-client relationships.
• However, accountants may be required to
testify in a court of law.
6-33
The Securities and Exchange
Commission (SEC)
• The SEC is a government
agency authorized to
establish and enforce the
accounting rules for
public companies.
• Public companies, have
to follow the reporting
rules of the SEC as well
as GAAP.
6-34
Sarbanes-Oxley Act (SOX)
of 2002
• Prior to 2002, the SEC
left much of the
regulation and
oversight of
independent audits to
the AICPA.
• However, SOX
established the PCAOB
to enforce audit
standards for SEC
audits.
6-35
End of Chapter Six
6-36