CA$H

and
Internal
Controls
 Internal Control consists of...
all the related methods and measures adopted
within a business to:
– safeguard its assets
• Employee and external theft, unauthorized use
– enhance accuracy and reliability of accounting
of its accounting records.
• Mistakes, errors, intentional misrepresentations
As of 2002, required by law in the
Sarbanes-Oxley Act (SOX)
 The
The 66 IC
IC PRINCIPLES
PRINCIPLES

1.
1. Establish
Establishresponsibility
responsibilitycenters
centers
 Make
Makeindividuals
individualsor
or specific
specificgroups
groupsaccountable
accountable
for
for specific
specifictasks
tasksunder
under their
their control
control
Example:
• One cashier per register.
• At end of shift, agree cash
received to register tape.
• If differences, cashier is
responsible.
2.
2. Segregate
Segregateemployee
employeeduties.
duties.
 Don’t
Don’t allow
allowonly
onlyone
oneperson
person totohave
haveboth:
both:
-- Physical
Physicalcustody
custodyof
of asset
asset
-- Record
Record transactions
transactions related
relatedtotoasset
asset
 Includes
Includesseparating
separating aaseries
seriesof
of related
relatedactivities.
activities.
Goal
Goalisistotohave
havemany
manyemployees
employeesinvolved
involvedso sononoone
one
can
canexecute
execute and
andcover
coverup
up an
anerror
errorororirregularity.
irregularity.
Example:
• Cashier forwards register
tape to accountant.
• Accountant records in
Cashier books but never has Accountant
access to cash.
3.
3. Independent
IndependentInternal
Internal verification
verification
 Periodic
Periodicmanagement
management review
review
 Supervision
Supervisionof
of daily
dailyactivities
activities
Example:
• Supervisor agrees
cashier’s tapes-cash-
accounting entries
Review-verify
• Supervisor reconciles
bank deposits to
books
Cashier Accountant
4.
4. Documentation
Documentationto toprovide
providean an audit
audit trail
trail
 Provide
Provide verifiable
verifiableevidence
evidence ofof transactions
transactions
 Pre-number
Pre-numberand andaccount
account for
for all
allitems
itemsin in sequence
sequence
 Originators
Originatorsand
and reviewers
reviewers sign-off
sign-off to toindicate
indicate
responsibility
responsibility
 Matching
Matching of
of related
related documents,
documents, time time stamp
stamp andand
secure
secureafter
after all
alltransaction
transactionprocessing
processingisiscomplete
complete
Examples:
Examples: Sales
SalesandandPurchase
Purchaseorders,
orders, invoices
invoices
Receiving
Receiving&& shipping,
shipping, bills
billsof
of lading
lading
Change
Changelogs logs
Material
Materialtransfer
transfer requests
requests
5.
5. Physical,
Physical, mechanical
mechanical and and electronic
electroniccontrol
control
over
over assets,
assets, Data
Datasecurity
security
Examples:
Examples: Password
Passwordaccess
access
Locks,
Locks, guards,
guards, alarms
alarms
Data
Databack-up
back-up
Virus
Virusprotection
protection
Anti-theft
Anti-theft systems,
systems, scanners
scanners
Limited
Limited authorized
authorizedcheck
checksigners
signers
5.
5. Others
Others
Examples:
Examples: Bonding
Bondingof of employees,
employees, background
background
checks,
checks, rotation
rotation of
of duties,
duties, required
requiredvacations,
vacations,
approved
approvedvendor
vendorlists
listsand
andprices,
prices, internal
internal and
and
external
externalindependent
independent audits,
audits, etc,
etc, etc
etc
 Reporting Cash
• Cash and Cash Equivalents
– Readily convertible to known
amount of cash. Examples:
• Treasury bills
• Commercial paper
• Money Market Funds
 Reporting Cash
• Restricted Cash
- Cash set aside for special
purpose
- Non-current asset if not
to be used within a year
 Use of a Business Bank account...
• allows for better separation of business versus
personal transactions (especially sole proprietor)
• provides a double record of all bank
transactions
– one by the business
– one by the bank
• Requires monthly reconciliation of bank
account
– Identifies errors, missing items on books or bank
 BALANCE PER BANK BALANCE PER BOOKS

Items Books don’t know

+ Deposits In Transit + Credit Memos
Items Bank doesn’t know

- Outstanding Checks - Debit Memos

+ - Other + - Other
ADJUSTED BALANCE ADJUSTED BALANCE
• Make journal entry based on items that haven’t been
recorded yet (That is, the balance per books side).
• Balance sheet will show the Adjusted Balance.
EXAMPLE:
ConfirmBalance
Bank Statement Beginning cash debit last December
on 1/01/08 8700
Deposits: 1/1/08 = 1200, 1/6/08 = 3200, 1/15/08 = 2000,
1/23/08 = 2800, 1/28/08 = 1600 10800
Checks: Cash in checking #123 500 #128 420
1/1/08 Bal 8400 #125 #124650 1000 #130 125
1/06/08 3200 #126 #125350 650 #133 800
1/15/08 2000 #127 #126
2000 350 #134 445 -4290
#128 420
Other: Bank Charges-
1/23/08 2800Debit Memo 15.
#129 60 -15
Bank1/28/08 1600 Balance
Statement Ending #130 on 125
1/31/08 15195
1/31/08 2200 #131 750
January DIT #132 440
#133 800
#134 454
1/31/08 Bal 14151
 EXAMPLE: Confirm o/s checks last month. Also
look for
Bank Statement Beginning last month
Balance that are still o/s. 8700
on 1/01/08
Deposits: 1/1/08 = 1200, 1/6/08 = 3200, 1/15/08 = 2000,
1/23/08 = 2800, 1/28/08 = 1600 10800
Checks: #123 500 #128 420
Cash in checking #124 1000 #130 125
8 Bal 8400 #125 650 #125 650 #133 800
08 3200 #126 350 #126 350 #134 445 -4290
#127 2000
January
08 Other: Bank Charges- Debit
420 Memo 15. -15
2000
#128
outstanding
08 Bank 2800
Statement Ending60
#129 Balance on 1/31/08 15195
08 checks
1600 #130 125
08 2200 #131 750
Total = 3250 #132 440
#133 800
#134 454
8 Bal 14151
EXAMPLE:
Bank Statement Beginning Balance on 1/01/08 8700
Deposits: 1/1/08 = 1200, 1/6/08 = 3200, 1/15/08 = 2000,
1/23/08 = 2800, 1/28/08 = 1600 10800
Checks: #123 500 #128 420
#124 1000 #130 125
#125 650 #133 800
#126 350 #134 445 -4290
Other: Bank Charges- Debit Memo 15. -15
Bank Statement Ending Balance on 1/31/08 15195
BANK 15195. BOOKS 14151.

+ DIT 2200.

- O/S Checks 3250. - Debit Memos 15.

+ Other 9.
ADJ BALANCE 14145. ADJ BALANCE 14145.
Bank Fees Expense 15.
Cash 15.
Cash 9.
XXXXXX 9.
Managing Cash
• Budget for shortages
– See Cash Budget discussion
• Minimize working capital needs:
– Speed up A/R collections
– Delay A/P payments
– Invest idle cash
• Consider long range needs
– Investing activities such as
equipment replacement
Cash Budget
• Planning the company's cash
needs is a key business activity.
• Cash budget shows:
– Expected cash received
– Projected cash spent
– Anticipated shortages
(need to borrow)
Cash budget format: Usually prepared monthly,
quarterly or annually
Period 1
Example Say sale terms are all
Begin cash
June 09 n/30.
+ Cash received + 890,000
Rs.120,000
Rs.1,010,000 Look at May sales for
Available cash
June receipts.
- Cash disbursed
Excess(deficiency) + Cash received Assume May sales =
Rs. 890,000.
+ borrowing
- repayments
End cash
Cash budget format: Usually prepared monthly,
quarterly or annually
Example
Period 1 June 09 Say ½ payments
Begin cash Rs.120,000 are due n/30.
+ Cash received ++ Cash890,000
received Other ½ are due
upon receipt.
Available cash Rs.1,010,000
- Cash disbursed - Cash 980,000
disbursed Look at May and
June expenses.
Excess(deficiency)
Assume: May
+ borrowing exp = Rs.1040,000,
- repayments June exp =
End cash Rs.920,000.
½ x 1040,000 +
½ x 920,000
Cash budget format: Usually prepared monthly,
quarterly or annually
Example
Period 1 June 09
Begin cash Rs.120,000
+ Cash received + 890,000
Available cash Rs.1,010,000
- 980,000 Assume the
- Cash disbursed
company would
Excess(deficiency) Rs.30,000
like a minimum
+ borrowing + 20,000 balance in cash of
- repayments - 0 Rs.50,000.
End cash Rs. 50,000
Cash budget format: Usually prepared monthly,
quarterly or annually
Example
Period 1 June 09 Period 2
Begin cash Rs.120,000 Begin cash
+ Cash received + 890,000 + Cash received
Available cash Rs.1,010,000 Available cash
- Cash disbursed - 980,000 - Cash disbursed
Excess(deficiency) Rs.30,000 Excess(deficiency)
+ borrowing + 20,000 + borrowing
- repayments - 0 - repayments
End cash Rs. 50,000 End cash
 PETTY CASH
• System used for items which can’t be paid by check
or it’s more convenient to pay cash.
• Uses IMPREST system:
- Establish a Fund with a fixed contribution.
- Replenish fund from checking account periodically
Petty Cash xxxx
Cash xxxx
TO SET UP FUND INITIALLY.
•Use cash to pay for items. Get receipts. No
journal entries made at this time.
•As cash in fund gets low:
Postage Expense xxxx
Supply Expense xxxx
Travel Expense xxxx
Entertainment Expense xxxx
Cash xxxx
TO REPLENISH PETTY CASH & RECORD EXPENSES.