Unit 6 – Chapter 5

 Describe the Sarbanes-Oxley Act of 2002 and its impact on internal controls and financial reporting.

 One of the most important and significant laws affecting publicly held companies in recent history.  Attempts to restore public confidence in corporate financial reporting.  Requires public companies to improve internal controls that safeguard assets.

 Control Environment  Risk Assessment  Control Procedures  Monitoring  Information and Communication

 Identifies risks so management can take steps to control them.

 Competent Personnel, Rotating Duties, and Mandatory Vacations.  Separating Responsibilities for Related Operations.  Separating Operations, Custody of Assets, and Accounting.  Proofs and Security Measures.

 Locates weaknesses and improves control effectiveness.  Includes ongoing efforts and separate evaluations.

 Needed by management to guide operations and ensure compliance with reporting, legal, and regulatory requirements.  Can use external information to assess events and conditions that impact decision making and external reporting.

 Cash includes coins, currency, checks, money orders, and money on deposit that is available for unrestricted withdrawal.  Cash is the asset most likely to be diverted and improperly used by employees.

 Cash must be controlled from the time it is received to the time it is deposited at a bank.  Two sources:  Customers purchasing products/services.  Customers making payments on account.

 Cash Received in the Mail  Need to separate the duties of cash collection (cashier’s department) and cash recording (accounting department).  Cash Received by EFT  Enhances internal controls over cash since employee handling of cash is eliminated.

 Control should provide reasonable assurance that payments are made for only authorized transactions and that cash is used efficiently.  Voucher System  Cash Paid by EFT

 Bank accounts help control cash by:  Safeguarding cash.  Providing double recording of cash transactions.  Providing a comparison with business records.  Facilitating the transfer of funds.

1. Add outstanding deposits to bank balance. 2. Deduct outstanding checks from bank balance. 3. Add credit memos not recorded to company balance. 4. Deduct debit memos not recorded from company balance. 5. Correct all errors.

 Used for making small payments for office- related items (e.g., postage).  Must estimate the cash needed for payments from the fund each period.  Petty cash custodian manages the fund and reimburses employees for small expenditures.  Fund is replenished at certain intervals and transactions are recorded.

 Listed first because it is the most liquid asset.  Cash equivalents include:  U.S. Treasury Bills  Commercial Paper  Money Market Funds  Cash and Cash Equivalents listed as one amount.

 Take a moment to look over exercise 5-7 in your textbook. We can then discuss it together.

 Quality Sound Co. should not have relied on the unusual nature of the vendors and delivery frequency to uncover this fraud. The purchase and payment cycle is one of the most critical business cycles to control, because the potential for abuse is so great. Purchases should be initiated by a requisition document. This document should be countersigned by a superior so that two people agree as to what is being purchased. The requisition should initiate a purchase order to a vendor for goods or services. The vendor responds to the purchase order by delivering the goods. The goods should be formally received using a receiving document. An accounts payable clerk matches the requisition, purchase order, and invoice before any payment is made.

 Such “triple matching” prevents unauthorized requests and payments. In this case, the requests were unauthorized, suggesting that the employee has sole authority to make a request. Second, this employee had access to the invoices. This access allowed the employee to change critical characteristics of the invoice to hide the true nature of the goods being received. The invoice should have been delivered directly to the accounts payable clerk to avoid corrupting the document. There apparently was no receiving document (common for smaller companies); thus, only the invoice provided proof of what was received and needed to be paid. If there had been a receiving report, the invoice could not have been doctored and gone undetected, because it would not have matched the receiving report.

 Take a moment to look over exercise 5-21 in your textbook. We will go over the bank reconciliation together.

 Are there any questions???