Chapter 7
Define internal control

Organizational plan and all the related measures to:
Safeguard
assets
Encourage
employees to
follow company
policies
Ensure accurate,
reliable
accounting
records
Promote
operational
efficiency
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3
Explain the Sarbanes-Oxley Act


Congress passed SOX after the Enron and
WorldCom scandals
Provisions include:
◦ Public companies must issue an internal control report
◦ Created Public Company Accounting Oversight Board
 Oversees work of auditors of public companies
◦ Accounting firms may not both audit and provide
consulting services to the same company
◦ Stiff penalties for violators
 20 – 25 years in prison
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5
List and describe the components of internal
control and control procedures
Monitoring of controls
 Information System
 Control procedures
 Control Environment
 Risk Assessment

MICER
Acronym to remember
five components
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
Competent, reliable and ethical personnel
◦ Trained and supervised

Assignment of responsibilities
◦ Each employee has clearly defined responsibilities

Separation of duties
◦ Operations separate from accounting
◦ Custody of assets separate from accounting

Audits
◦ Accounting records should be examined regularly

Documents
◦ Invoices should be pre-numbered
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
Electronic Devices
◦ Inventory sensors

Other controls
◦
◦
◦
◦
Alarms and security cameras
Loss-prevention specialists
Bonding employees
Mandatory vacations
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
Questions?
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1.
Which of the following is NOT an
internal control measure?
A.
B.
C.
D.
Safeguarding assets
Maximizing profits
Promoting operational efficiency
Ensuring accurate records
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11
1.
Which of the following is NOT an
internal control measure?
A.
B.
C.
D.
Safeguarding assets
Maximizing profits
Promoting operational efficiency
Ensuring accurate records
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12
2.
Which of the following is a provision of
the Sarbanes-Oxley Act (SOX)?
A.
CPA firms cannot prepare tax returns of
audit clients.
B. Public companies must report on
internal controls.
C. CPA firms may not perform certain
consulting services for audit clients.
D. All of the above are provisions of SOX.
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rights reserved.
13
2.
Which of the following is a provision of
the Sarbanes-Oxley Act (SOX)?
A.
CPA firms cannot prepare tax returns of
audit clients.
B. Public companies must report on
internal controls.
C. CPA firms may not perform certain
consulting services for audit clients.
D. All of the above are provisions of SOX.
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rights reserved.
14
Explain control procedures unique to e-commerce

Risks
◦ Stolen credit card numbers and passwords
◦ Computer viruses and Trojans
◦ Phishing

Security measures
◦ Encryption
◦ Firewalls
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
Collusion:
◦ Two or more employees work together to defraud the
company

Cost:
◦ The stricter the internal control, the greater the cost
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17
Demonstrate the use of a bank account as a
control device
Signature
card
Deposit
ticket
Bank
statement
Check
Bank
reconciliation
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19
Prepare a bank reconciliation and the related
journal entries

Cash account in
general ledger

Bank statement
Usually show different balances
Timing differences due to time lag in
recording transactions
A bank reconciliation is prepared to
explain these differences
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21
Bank
Book
Add:
Add:
Deduct:
Deduct:
Adjusted bank balance
Adjusted book balance
These amounts should equal each other
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22
Bank Statement Balance
Add: Deposits in transit.
Deduct: Outstanding checks
Add or Deduct: Bank errors
Book Balance in ledger
Add: Bank collections
Add or Deduct : EFT transfers
Deduct: Service charges
Add: Interest revenue
Deduct: Nonsufficient funds check from
customer(NSF) and cost of printed checks
Add or Deduct: Book errors
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23
Book balance
$,$$$
Add: Bank collection from customer $$$
Interest revenue
$$$
Subtotal
$,$$$
Deduct: Bank service charge
$$
NSF check
$$$
Reconciled book balance
$,$$$
Any item under “Book Balance” requires a journal
entry to adjust the Cash account
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24
GENERAL JOURNAL
DATE
DESCRIPTION
REF
May 31 Cash
Accounts receivable
DEBIT
CREDIT
$$$
$$$
Bank collection from customer
Cash
Interest revenue
$$
$$
Interest earned on bank balance
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25
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Miscellaneous expense
Cash
DEBIT
CREDIT
$$
$$
Bank service charge
Accounts receivable
Cash
$$$
$$$
NSF check
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D.J. Hill
Bank reconciliation
May 31, 2012
Balance per bank
Add: Deposit in transit
Less: Outstanding checks:
Adjusted cash balance
$
$
95
275
375
1,205
Balance per books
$ 1,290
Less: Printed checks
(25)
Service charge
(15)
$ (370)
Error check #624
(40)
$ 1,210 Adjusted cash balance $ 1,210
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
Questions?
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28
3.
Managers setting the proper “tone at
the top” is which component of internal
control?
A.
B.
C.
D.
Monitoring of controls
Information system
Control environment
Risk assessment
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rights reserved.
29
3.
Managers setting the proper “tone at
the top” is which component of internal
control?
A.
B.
C.
D.
Monitoring of controls
Information system
Control environment
Risk assessment
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rights reserved.
30
4.
This internal control procedure for
protecting customer data online involves
rearranging messages by a mathematical
process.
A.
B.
C.
D.
Phishing
Firewalls
PINs
Encryption
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31
4.
This internal control procedure for
protecting customer data online involves
rearranging messages by a mathematical
process.
A.
B.
C.
D.
Phishing
Firewalls
PINs
Encryption
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32
Apply internal controls to cash receipts





Receipt is issued for each transaction
Cash drawer opens when a transaction is
entered
At the end of a shift, manager proves cash by
comparing cash in drawer with machine’s record
of sales
At least once a day, cashier deposits cash in
bank
Register tape sent to accounting
department
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



Incoming mail opened by a mailroom employee
Customer checks sent to treasurer and cashier
deposits money in bank
Remittance advice sent to accounting for journal
entries
Controller compares records of
◦ The day’s bank deposit amount from treasurer
◦ The debit to Cash made by the accounting department
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35
Apply internal controls to cash payments



Important internal control
Check provides record of payment
Must be signed by an authorized official who
reviews documents supporting the payment
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37
Document
Action
Purchase order
Company requests
goods from supplier
Invoice
Supplier sends
goods
Receiving report
Company receives
goods
Check
Company pays for
goods
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
Questions?
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rights reserved.
39
5.
Two or more people working together to
overcome internal control is called:
A.
B.
C.
D.
collusion.
mutiny.
conspiracy.
cooperation.
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40
5.
Two or more people working together to
overcome internal control is called:
A.
B.
C.
D.
collusion.
mutiny.
conspiracy.
cooperation.
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rights reserved.
41
6.
When preparing a bank reconciliation,
outstanding checks would be:
A.
B.
C.
D.
added on the bank side.
subtracted from the bank side.
added on the book side.
subtracted from the book side.
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42
6.
When preparing a bank reconciliation,
outstanding checks would be:
A.
B.
C.
D.
added on the bank side.
subtracted from the bank side.
added on the book side.
subtracted from the book side.
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43
Explain and journalize petty cash transactions


Cash fund kept on hand to pay for small
expenditures
Controls needed:
◦ Designate a custodian of petty cash fund
◦ Keep a specific amount of cash on hand
◦ All fund payments are supported with a petty cash ticket
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45


Check written for designated amount and cashed
Journal entry:
General Journal
Page 8
Date
May
Account Titles and Description
1 Petty cash
PR
Dr.
Cr.
$$$
Cash
$$$
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46
A numbered ticket is prepared for each expenditure
Petty Cash Ticket No. 15
May 2, 2009
Date: _________________
Paid to: _______________
Foster’s Office Supply
For: ___________________
Office Supplies
$8.00
Amount: ________________
Sharon Kahl
Approved by: ___________
Carol Miller
Payment received by: ___________
Debit Account No.: _________
Supplies Expense – Account No. 615
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Petty Cash Ticket No. 15
Date: _________________
May 2, 2007
Paid to: _______________
Foster’s Office Supply
For: ___________________
Office Supplies
$8.00
Amount: ________________
Sharon Kahl
Approved by: ____________
Carol Miller
Payment received by: _____________
Debit Account No.: _________
615
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48


Maintaining petty cash at its designated balance
Money in petty cash plus the receipts should
always equal designated balance
Petty
cash
balance
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

Total amounts on petty cash tickets
Add to cash remaining in fund
◦ Should equal petty cash fund balance
◦ If it doesn’t, missing amount is Cash short and over



Journal entry prepared to record expenditures
A new check is cashed to replenish fund to its
original balance
Cash is placed in petty cash box
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50



Account used whenever a cash fund is short or
over
May have either a debit or credit balance
Reported as expense or revenue depending on
ending balance
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51
General Journal
Page 8
Date
Account Titles and Description
Aug 31 Office supplies
Delivery expense
Cash short & over
Cash
PR
Dr.
Cr.
60
30
8
82
Replenish petty cash fund
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52
#1
The imprest system requires that the petty cash box
contains cash and receipts that total the amount of the
imprest balance. This clearly identifies the amount of
cash for which the custodian is responsible, and that is
the system’s main internal control feature.
General Journal
#2
Date
Account Titles and Description PR
Dec 1 Petty cash
Cash
Dr.
Cr.
$150
$150
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53
General Journal
Date
Account Titles and Description
Dec 31 Office supplies
PR
Dr.
Cr.
111
Delivery expense
30
Cash
136
Cash short & over
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5
54
Describe ethical business issues related to
accounting




Analyzing right from wrong
Most companies have a code of ethics
Accountants held to higher standard
Ethical decision making
◦
◦
◦
◦
Define the situation
Specify alternatives
Identify consequences
Make the decision
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56

Questions?
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57
7.
When preparing a bank reconciliation,
bank services charges would be:
A.
B.
C.
D.
added on the bank side.
subtracted from the bank side.
added on the book side.
subtracted from the book side.
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rights reserved.
58
7.
When preparing a bank reconciliation,
bank services charges would be:
A.
B.
C.
D.
added on the bank side.
subtracted from the bank side.
added on the book side.
subtracted from the book side.
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59
8.
Which of the following bank
reconciliation items requires a journal
entry?
A.
B.
C.
D.
Outstanding checks
Deposits in transit
NSF check
All of the above
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60
8.
Which of the following bank
reconciliation items requires a journal
entry?
A.
B.
C.
D.
Outstanding checks
Deposits in transit
NSF check
All of the above
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61
9.
The entry to establish a petty cash fund
includes a:
A.
B.
C.
D.
debit to Cash.
debit to Petty cash.
credit to Petty cash.
debit to miscellaneous expense.
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62
9.
The entry to establish a petty cash fund
includes a:
A.
B.
C.
D.
debit to Cash.
debit to Petty cash.
credit to Petty cash.
debit to miscellaneous expense.
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63
10. At the end of the month, a $100 petty
cash fund has $92 in receipts and $6 in
cash. The fund is:
A.
B.
C.
D.
in balance.
$6 over.
$2 over.
$2 short.
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64
10. At the end of the month, a $100 petty
cash fund has $92 in receipts and $6 in
cash. The fund is:
A.
B.
C.
D.
in balance.
$6 over.
$2 over.
$2 short.
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65
11. At the end of the month, a $100 petty
cash fund has $92 in receipts and $6 in
cash. The journal entry to replenish the
fund would include a:
A.
B.
C.
D.
credit to Cash for $94.
credit to Cash for $92.
debit to Petty cash for $92.
credit to Petty cash for $94.
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66
11. At the end of the month, a $100 petty
cash fund has $92 in receipts and $6 in
cash. The journal entry to replenish the
fund would include a:
A.
B.
C.
D.
credit to Cash for $94.
credit to Cash for $92.
debit to Petty cash for $92.
credit to Petty cash for $94.
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67