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

Rationalization

Opportunity…

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 a Company’s Assets  Assure Financial Statement are RELIABLE  Assure EFFICIENCY of the Company’s 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

Segregation of duties

Hire Competent personnel

Documentation procedures (control numbers on all transactions)

Develop plans/budgets

Maintain adequate records (accounting)

Physical/electronic controls

Independent internal verification/Audits

Accounting for CASH

Cash received….On Account (from a Customer)

Cash received from a retail cash Sale

Checks…

Petty Cash

BANK STATEMENTS  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 Company’s “books” have in the Cash Account ending Balance  WHY?  Timing Issues…

PLUS Deposits recorded by the BANK but not yet by The Company. (And corrections) Balance per BOOKS PLUS : Deposits not Yet recorded by the Bank (and corrections) Balance per BANK LESS : Check not yet received by the BANK (and corrections) = Adjusted Balance per BANK = Adjusted Balance per BOOKS LESS : Disbursements recorded by the BANK but not yet by The Company. (And Corrections). BANK RECONCILIATION – BANK STATEMENT TO COMPANY’S “BOOKS” =

Deposits in Transit - Checks (Checks (from customers) ADDED to the Company’s books but not yet recorded by the Bank. Assume three checks were added to the Company’s Cash balance, but do not yet appear on the Bank Statement, $225. Action: Add to Bank Balance.

Outstanding Checks – Checks deducted from the Company’s 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 CHECKAMOUNT 167 $ $ $ $ $ 1, Action: Deduct from Bank Balance.

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) $ 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 Company’s 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, Balance per books $ 5, PLUS: Deposits in Transit $ Collection of Note $ LESS: Outstanding Checks Collection Fee $ $ NSF Check $ $ Service Fee $ $ $ $ 1, $ Adjusted Balance per Bank $ 5,572.29Adjusted Balance per Books $ 5,572.29

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!