Accounting Chapter 5

If the company's accountant mistakenly recorded a $58 deposit as $85, the error would be shown on the bank reconciliation as:

$27 deduction from the book balance.

If a cashier rang up sales totaling $4,000, but only $3,997 to deposit, the journal entry recorded would be:

➢A debit to cash of $3,997 ➢A debit to cash shortage of $3 ➢A credit to sales revenue of $4,000

Company's Book Balance

➢EFT Deposits are added to the book balance. ➢NSF Checks are deducted to the book balance. ➢Bank Service Charges are deducted to the book balance.

3) Accounting Department

1) Compares cash register records with cash count sheet and bank deposit slip, independently verifies that cash received equals cash deposited and that sales revenue equals cash and electronic payment received. 2) Prepares journal entry by documenting procedure so that debits = credits and A =L+SHE.

1) Cashier

1) Scans items sold, documents procedure indicating price and quantity sold. 2) Collects customer payment, restricts access by placing cash in register. 3) Prepares cash count sheet, documents procedure by totaling cash collected during shift.

2) Supervisor

1)Compares cash in register with cash count sheet, independently verifies that cash received equals cash count sheet. 2) Stores cash in vault box, restricts access so that cash is inaccessible until deposited. 3) Completes bank deposit, documents procedure by depositing cash in bank account.

Voucher System

A process for approving and documenting all purchases and payments on account. It employs various forms of documentation related steps in the control over cash.

The Sarbanes-Oxley Act (SOX)

A set of regulations passed by congress in 2002 in an attempt to improve financial reporting and restore investor confidence.

3) Restrict Access

Do not provide access, assets or information unless it is needed to fulfill assigned responsibilities.

2) Segregate Duties

Does not make one employee responsible for all parts of a process. Small companies will have trouble with this.

3) Control Activities

Include various work responsibilities and duties completed by employees to reduce risks to an acceptable level.

1) Corruption

Involves misusing one's position for inappropriate personal gain.

Shipping goods to customers without receiving orders from those customers, and recording the transactions as revenue would:

Overstate a company's net income.

1) Control Environment

The altitude that people in the organization hold regarding internal control.

1) Incentive

The employee has a reasoning for committing the fraud.

Bank Balance

➢Deposits in transit are added to the bank balance. ➢Outstanding checks are deducted from the bank balance.

2) Reduce Opportunities

All public companies must establish an audit committee of independent directors, and evaluate and report the effectiveness of internal control over financial reporting.

Cash Overcharge

An asset account that is reported on the income statement as a miscellaneous expense; the Cash Overage account is reported as miscellaneous revenue.

Fraud

An attempt to deceive others for personal gain. Lying, cheating and stealing.

4) Information and Communication

An effective internal control system generates and communicates information about activities affecting the organization to support sound decision.

Bank Reconciliation

An internal report prepared to verify the accuracy of both the bank statement and the cash accounts of a business or an individual.

1) Establish Responsibility

Assign each task to only one employee.

Controls Over Cash Receipts

Businesses can receive cash in person or through an EFT.

5) Independent Verify

Check others' work. Compare cash balance of company to the cash balance of the bank and account for any differences.

2) Risk Assessment

Managers should continuously access the potential for fraud and other risks that could prevent the company from achieving its objectives.

Commonly Used Internal Controls

Mandatory vacations, anonymous hot lines, bonding employees, and segregating duties.

3) Financial Statement Fraud

Misreporting amounts in the financial statements, usually to portray more favorable financial results than what actually exist.

Controls Over Cash Payments

Most cash payments involve writing a check or completing an EFT. In the rare case where a company pays for purchases with dollars and coins, it uses a petty cash system. The primary goal of internal controls for all cash payments is to ensure that the business pays only for properly authorized transactions.

4) Document Procedures

Prepare documents to show activities that have occurred. Assigning sequential numbers to cash sales, so that the account staff can ensure that every sale has been recorded.

Cash Paid by Check for Purchases on Account in a Voucher System

Purchase requisition, purchase order, receiving report, suppliers invoice and company check or EFT transaction number.

The services provided by banks help businesses to control cash by:

Restricting access, documenting procedures, and independently verifying. Not segregating duties.

Internal Controls for Processing Cash

Segregating these duties ensures that those who handle the cash (cashiers and supervisors) do not have access to those who record it (the accounting staff).

Petty Cash

Small amount of cash a company has on hand to pay or reimburse employees for purchasing small things. Gets reported on the balance sheet.

Loan Covenant

Terms of a loan agreement that if broken, entitle the lender to renegotiate loan terms or force repayment.

2) Opportunity

The employee has a means of committing fraud. Opportunities to commit fraud usually stem from weak internal controls.

3) Rationalization

The employee perceives the misdeed as unavoidable or unjustifiable.

5) Monitoring Activities

The internal control system is evaluated often to determine whether it is working as intended.

Internal Control

The procedures and strategies used to protect the firm's assets from theft, damage and misuse. It promotes efficient and effective operations. It helps protect against theft of assets. It enhances the management will behave ethically.

2) Asset Misappropriation

Theft and embezzlement. Cash is usually the target.

1) Counteract Incentives

Those who willfully misrepresent financial results face stiff penalties.

3) Encourage Honesty

Tip lines, whistle-blowing protection, and ethics code.