WEYGANDT . KIESO . KIMMEL . TRENHOLM . KINNEAR . BARLOW . ATKINS
PRINCIPLES OF
FINANCIAL ACCOUNTING
CANADIAN EDITION
Chapter 7
Internal Control and Cash
Prepared by:
Debbie Musil
Kwantlen Polytechnic University
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Internal Control and Cash
• Internal control
– Fraud
– Internal controls and activities
– Limitations of internal control
• Cash controls
– Internal controls over cash receipts and
payments
• Using a bank
– Using a bank account
• Reporting cash
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Chapter 7: Internal Control and Cash
1.
2.
3.
4.
Study Objectives
Explain the activities that help
prevent fraud and achieve internal
control.
Apply control activities to cash
receipts and cash payments.
Describe the control features of a
bank account.
Report cash on the balance sheet.
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Fraud
• An intentional dishonest act
• Results in personal financial benefit
by:
– Misappropriating (stealing) assets, or
– Misstating financial statements
• Three factors that contribute to fraud:
– Opportunity to commit fraud
– Financial pressure
– Rationalization (justify their actions)
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Internal Control
• Related methods and measures that
management designs and implements to
help achieve:
– Reliable financial reporting
– Effective and efficient operations
– Compliance with laws and regulations
• Effective internal control systems have five
basic components:
– Control environment
– Risk assessment
– Control activities
– Information and communication
– Monitoring
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Internal Control Systems
• Control environment
– Create a culture that values clear rules
and expects everyone to follow the rules
• Risk assessment
– Identify and analyze factors that create
risk, and determine how to manage
• Control activities
– Design policies and procedures to
address the risks faced by the company
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Internal Control Systems 2
• Information and communication
– Identify, collect and communicate
relevant information to appropriate
parties
• Monitoring
– Identifying and reporting problems to
appropriate levels where action can be
taken
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Control Activities
• Establishment of responsibility
– Make specific employees responsible for
specific tasks, including authorization
• Segregation of duties
– Duties are divided in a manner that
eliminates the ability to commit a fraud
and cover it up
• Documentation procedures
– Rules covering the handling and control
of documents (such as pre-numbering)
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Control Activities 2
• Physical and IT controls
– Over access to and use of assets and
records
• Independent checks of performance
– Reviews of records and performance by
independent employees or external
parties
• Human resource controls
– Bonding, rotation of duties, requiring
vacations, background checks
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Limitations of Internal Control
• Reasonable assurance: cost of internal
control should not be more than expected
benefit
• Human element: fatigue, carelessness,
indifference, lack of training
• Collusion: two or more employees working
together to overcome segregation control
• Size of business: effective controls are more
difficult in smaller organizations
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Chapter 7: Internal Control and Cash
Study Objectives
1. Explain the activities that help
prevent fraud and achieve internal
control.
2. Apply control activities to cash
receipts and cash payments.
3. Describe the control features of a
bank account.
4. Report cash on the balance sheet.
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Cash Controls
• Effective control over cash is essential to:
– Safeguard cash
– Ensure the accuracy of accounting
records
• Types of cash receipts:
– Over-the-counter
– Bank debit and credit card transactions
– Mail-in receipts
– Receipts via electronic funds transfer
(EFT)
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Control Over Cash Receipts
• Responsibility:
– Only designated personnel are
authorized to handle cash receipts
• Segregation of duties:
– Different individuals receive and record
cash receipts, have custody of cash
• Documentation procedures:
– Use remittance advices, cash register
tapes, deposit slips
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Control Over Cash Receipts 2
• Physical controls:
– Store cash in safes and bank vaults
– Limit access
– Use cash registers
– Deposit cash daily
• Independent checks of performance:
– Daily cash counts and comparisons of
receipts
• Human resource controls:
– Bonding; require vacations
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Debit Card Transactions
• Sales using debit cards are considered cash
transactions
– Retailer receives cash directly into bank account at
some regular interval (e.g. daily)
– Proceeds received are net of transaction fees
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Bank Credit Card Transactions
• Sales using bank credit cards are also considered
cash transactions
– Retailer receives cash directly into bank account
– Proceeds received are net of transaction fees
• Fees are generally higher than debit card fees
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Mail in & Electronic Receipts
• Mail-in receipts:
– Open mail in presence of two clerks
– Remittance slips sent to Accounting
independently of cash
• Electronic receipts:
– On-line banking: cash transferred from
customer’s bank account to company’s bank
account
– Company journalizes from its bank
statement
– Pre-authorized payments: company initiates
payment and automatically journalizes
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Control Over Cash Payments
• Made by cheque, EFT or petty cash
• Establish responsibility:
– Only designated individuals can sign
cheques
• Segregation of duties:
– Different people approve and make
payments
• Documentation procedures:
– Use pre-numbered cheques and account
for numerical continuity
– Supported by approved invoice or similar
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Control Over Cash Payments
2
• Physical and IT controls:
– Secure blank cheques and restrict access
– Print cheques electronically or use writer
• Independent checks of performance:
– Compare cheques to invoices
– Reconcile bank statement regularly
• Human resources:
– Hire bonded personnel
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Chapter 7: Internal Control and Cash
Study Objectives
1. Explain the activities that help
prevent fraud and achieve internal
control.
2. Apply control activities to cash
receipts and cash payments.
3. Describe the control features of a
bank account.
4. Report cash on the balance sheet.
Copyright John Wiley & Sons Canada, Ltd.
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Use of a Bank Account
• Strengthens internal controls over cash
– Minimizes the amount of cash on hand
– A clearing house for receipts and cheques
– Provides a double record of cash transactions
• Bank deposits and cheques
– Duplicate deposits slips are stamped by bank
– Cheques usually require two authorized
signatures
• Bank reconciliation compares bank’s
balance with company’s balance and
explains any differences (Should be
removed)
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Bank Statement
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Chapter 7: Internal Control and Cash
Study Objectives
1. Explain the activities that help
prevent fraud and achieve internal
control.
2. Apply control activities to cash
receipts and cash payments.
3. Apply control activities to cash
payments.
4. Describe the control features of a
bank account.
Copyright John Wiley & Sons Canada, Ltd.
23
Reporting Cash
• Cash on the balance sheet includes:
– Coins, currency, cheques, money on deposit
– Bank debit and credit card transactions
– Cash equivalents: investments with a term of
three months or less that are easily sold
• Listed first on the balance sheet, as it is the
most liquid
• Bank overdrafts are reported as a liability
• Restricted cash is reported separately
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information contained herein.
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