Internal Control

and CASH
BY JUDITH PAQUETTE

Learning Objectives

Learn the elements of Internal Control

Discuss the role of Internal Control in a business to prevent fraud

Discuss Cash and Accounting for Cash

Know Internal Controls for Cash

Know the activities of Cash Management

Understand Financial Audits and Operational Audits

What is Fraud?
Dishonest

act by an
employee that results in
personal benefit to the
employee at a cost to the
employer.

Why does Fraud Happen?

Pressure
I

have debts and they are coming due

owe money

My

friends invited me to Vegas, I really want to

go
My
My

car payments are high

husband had surgery and we need the $ to

pay the medical bills.

Rationalization
I

earn a low wage.

got passed over for promotion

They

make so much, they dont need the

money

Im

only borrowing the $$...Ill pay it back

Everyones
Coming
Taking

doing it, even the supervisor!

in late, but having someone else sign in

supplies from the company

Opportunity
Company

must try to reduce/eliminate

opportunities. That is their job!

This

requires many elements of Internal

Control

The Sarbanes-Oxley Act,

2002
Companies must
develop principles of control over financial
reporting.
continually verify that controls are working.

Independent auditors must attest to the adequacy

of internal control.

SOX created the Public Company Accounting Oversight Board (PCAOB).

GOALs of Internal Control

SAFEGUARD
Assure

a Companys Assets

Financial Statement are RELIABLE

Assure

EFFICIENCY of the Companys

operations

Be

in COMPLIANCE with Government

Laws/Regulations

TYPES of Internal Control

PREVENTION

deter a
problem before IT HAPPENS
DETECTION discover a
problem as soon as possible
after it HAPPENS.

Elements of GOOD Internal

Control
1.
Establishment of responsibility
2.

Segregation of duties

3.

Hire Competent personnel

4.

Documentation procedures (control numbers on all

transactions)

5.

Develop plans/budgets

6.

Maintain adequate records (accounting)

7.

Physical/electronic controls

8.

Independent internal verification/Audits

Establishment of responsibility
Control is most effective when
only one person is responsible
for a given task.
EXAMPLES:
Cash Register
Passwords to track transactions

Segregation of duties
SEGREGATON OF DUTIES

#a Related duties, including physical custody and record

keeping, should be assigned to different individuals.

#b Record-Keeping of assets s/b separated from Physical

Custody of assets

Hire Competent personnel

HUMAN RESOURCE CONTROLS

1. Bond employees.
2. Rotate employees duties and require
vacations.
3. Conduct background checks.

Documentation procedures
(control numbers on all transactions)

DOCUMENTATION

Companies should use prenumbered documents and

account for all documents.

Be able to trace each document back to transaction/person.

Dont have unnumbered checks, invoices, blank forms!

Require approval signatures

Account for missing checks!

Develop plans/budgets

Maintain adequate records

(accounting)

Inspect/inventory Plant Assets

Reconcile books to reality

Take Physical Inventory and Adjust the books to match the physical
inventory

Accounts Receivable confirmation

Accounts Payable confirmation

Physical/electronic controls

Safes/vaults

Warehouses

Computers with passcodes

TV monitors

Time clocks

Alarms

Key cards/ID

Independent internal
verification/Audits
1.

Decides whether ADEQUATE Internal Controls are in place.

2.

Decides whether Internal Controls are actually WORKING.

3.

REPORT:
Any audit points (areas for improvement)

Accounting for CASH

Cash
Cash Receipts
Receipts Controls
Controls
Over-the-Counter Receipts

Illustration 7-4

Establishment of
Responsibility
Only designated
personnel are
authorized to handle
cash receipts
(cashiers)

Documentation
Procedures
Use remittance
advice (mail
receipts), cash
register tapes, and
deposit slips

Independent Internal
Verification
Supervisors count cash
receipts daily;
treasurer compares
total receipts to bank
deposits daily

Segregation of Duties
Different individuals
receive cash, record
cash receipts, and hold
the cash

Physical Controls
Store cash in safes
and bank vaults; limit
access to storage
areas; use cash
registers

Human Resource
Controls
Bond personnel who
handle cash; require
employees to take
vacations; deposit all
cash in bank daily

SO 3 Explain the applications of internal control principles to cash

Cash
Cash Receipts
Receipts Controls
Controls
Mail Receipts Cash received on Account
Mail receipts should be opened by two people, a list
prepared, and each check endorsed.
Copy of the list, along with the checks and remittance
advices, sent to cashiers department.
Cashier adds the checks to the over-the-counter
receipts and prepares a daily cash summary and makes
the daily bank deposit.
Copy of list sent to treasurers office for comparison
with total shown on daily cash summary.

Petty Cash

Petty Cash Fund - Used to pay small amounts.

Involves:
1. establishing the fund,
2. making payments from the fund, and
3. replenishing the fund.

USING A BANK STAT

Using A Bank is a Good Internal Control

It keeps cash on hand low

It creates a double record of transactions

It includes a BANK STATEMENT

Note: Ending
Balance of
$6,488.95

The Bank Statement

Rarely

equals what the Companys

books have in the Cash Account
ending Balance
WHY?
Timing Issues

BANK RECONCILIATION BANK STATEMENT TO COMPANYS BOOKS

Balance per
BOOKS

Balance per
BANK
PLUS: Deposits not
Yet recorded by the Bank (and
corrections)

PLUS Deposits recorded by the

BANK but not yet by
The Company. (And corrections)

LESS: Check not yet received by

the BANK (and corrections)

LESS: Disbursements recorded by

the
BANK but not yet by The Company.
(And Corrections).

= Adjusted Balance
per BANK

= Adjusted Balance
per BOOKS

Deposits in Transit - Checks

(Checks (from
customers) ADDED to the Companys books but
not yet recorded by the Bank.

Assume three checks were added to the

Companys Cash balance, but do not yet
appear on the Bank Statement, $225.
Action: Add to Bank Balance.

Outstanding Checks Checks

deducted from the Companys
books, but not yet cashed

Note the gap between Check # 166 and Check # 169

Checks 167 and 168 have NOT been Cashed; they are Outstanding.

Additional information: Checks # 172 and #173 (disbursements) were

recorded by the books, but NOT by the Bank

Action: Deduct
from Bank
Balance.

CHECK
167
168
172
173

$
$
$
$

AMOUNT
301.66
149.50
450.00
240.50

$ 1,141.66

Other Charges review the Bank

Statement for additional charges
and credits

A check bounced (e.g., it was returned because the customer

did not have enough money) $35.40 . Also called NSF (Not
Sufficient Funds)

The BANK charge a $10 monthly service fee for (welcome to the
world of FEEs)

Action: Deduct from BOOK

Balance.

Collection of a NOTE The BANK

collected a note and deposited it to the Companys
bank account, but it was not yet recorded by the
Company)
The Note Receivable was paid in full with
Principal of $300.
The Bank charged a $5 collection fee.
(more fees)

The BANK Reconciliation

WILSON CORPORATION

Balance Per Bank

$6,488.95

Balance per books

$5,322.69

PLUS:
DepositsinTransit

$225.00

PLUS:

CollectionofNote

$300.00

LESS:

LESS:

OutstandingChecks

CollectionFee

$5.00

167$301.66

NSFCheck

$35.40

168$149.50

ServiceFee

$10.00

172$450.00

173$240.50

$1,141.66

$50.40

FINAL Step Making the Journal

Entries for the Bank Reconciliation
You must create Journal Entries for ALL the items on
the right side of the Bank Reconciliation, to get the
Book Balance corrected:
1) To record a note collected, less a collection fee
2) To reclassify an NSF check back into Accounts
Receivable (because it was NOT collected)
3) To book the Bank Service Charge

To record a note collected, less a

collection fee

To reclassify an NSF check back

into Accounts Receivable
(because it was NOT collected)

To book the Bank Service Charge

Effective Cash Management

Monitoring Cash

Primary Activities of Cash Management

Effective Cash Management

Manage

Accounts Receivable!

Manage

Inventory Levels

Manage

Accounts Payable

INVEST

EXCESS CASH!

The End

GOOD BY AND GOOD LUCK!