Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 7 Internal Control and Cash

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Internal Control and Cash Internal control Internal control Control framework and activitiesControl framework and activities Limitations of internal controlLimitations of internal control Cash controls Cash controls Controls over cash receipts and disbursementsControls over cash receipts and disbursements Using a bank Using a bank Using and reconciling a bank accountUsing and reconciling a bank account Reporting cash Reporting cash

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Internal Control The process that management designs and implements to help achieve: The process that management designs and implements to help achieve: Reliable financial reportingReliable financial reporting Effective and efficient operationsEffective and efficient operations Compliance with laws and regulationsCompliance with laws and regulations Effective control framework has five components: Effective control framework has five components: Control environmentControl environment Risk assessmentRisk assessment Control activitiesControl activities Information and communicationInformation and communication MonitoringMonitoring

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Control Framework Control environment Control environment Create a culture that values clear rules and expects everyone to follow the rulesCreate a culture that values clear rules and expects everyone to follow the rules Risk assessment Risk assessment Evaluate internal vulnerabilities and connection with external environmentEvaluate internal vulnerabilities and connection with external environment Control activities Control activities Policies and procedures that help ensure management’s directions are followedPolicies and procedures that help ensure management’s directions are followed

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Control Framework 2 Information and communication Information and communication Identify, collect and communicate relevant informationIdentify, collect and communicate relevant information Monitoring Monitoring Identifying and reporting problems to appropriate levelsIdentifying and reporting problems to appropriate levels

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Control Activities Establishment of responsibility Establishment of responsibility Make specific employees responsible for specific tasks, including authorizationMake specific employees responsible for specific tasks, including authorization Segregation of duties Segregation of duties Duties are divided in a manner that eliminates the potential for errors or irregularitiesDuties are divided in a manner that eliminates the potential for errors or irregularities Documentation procedures Documentation procedures Rules covering the handling and control of documentsRules covering the handling and control of documents

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Control Activities 2 Physical and IT controls Physical and IT controls Over access to and use of assets and recordsOver access to and use of assets and records Independent checks of performance Independent checks of performance Reviews of records and performanceReviews of records and performance Internal reviews by independent employees or internal auditInternal reviews by independent employees or internal audit Independent external reviews by external auditorsIndependent external reviews by external auditors Human resource controls Human resource controls Bonding, rotation of duties, requiring vacationsBonding, rotation of duties, requiring vacations

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Limitations of Internal Control Reasonable assurance: cost of internal control should not be more than expected benefit Reasonable assurance: cost of internal control should not be more than expected benefit Human element: fatigue, carelessness, lack of training Human element: fatigue, carelessness, lack of training Collusion: two or more employees working together to overcome segregation control Collusion: two or more employees working together to overcome segregation control Size of business: effective controls are more difficult in smaller organizations Size of business: effective controls are more difficult in smaller organizations

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Cash Controls Effective control over cash is essential to: Effective control over cash is essential to: Safeguard cashSafeguard cash Ensure the accuracy of accounting recordsEnsure the accuracy of accounting records Types of cash receipts: Types of cash receipts: Over-the-counterOver-the-counter Bank debit and credit card transactionsBank debit and credit card transactions Mail-in receiptsMail-in receipts Receipts via electronic funds transfer (EFT)Receipts via electronic funds transfer (EFT)

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Control Over Cash Receipts Responsibility: Responsibility: Only designated personnel are authorized to handle cash receiptsOnly designated personnel are authorized to handle cash receipts Segregation of duties: Segregation of duties: Different individuals receive and record cash receipts, have custody of cashDifferent individuals receive and record cash receipts, have custody of cash Documentation procedures: Documentation procedures: Use remittance advices, cash register tapes, deposit slipsUse remittance advices, cash register tapes, deposit slips

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Control Over Cash Receipts 2 Physical controls: Physical controls: Store cash in safes and bank vaultsStore cash in safes and bank vaults Limit accessLimit access Use cash registersUse cash registers Independent checks of performance: Independent checks of performance: Daily cash counts and comparisons of receiptsDaily cash counts and comparisons of receipts Human resource controls: Human resource controls: Deposit cash daily; bonding; require vacationsDeposit cash daily; bonding; require vacations

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Debit Card Transactions Sales using debit cards are considered cash transactions Sales using debit cards are considered cash transactions Retailer receives cash directly into bank account at some regular interval (e.g. daily)Retailer receives cash directly into bank account at some regular interval (e.g. daily) Proceeds received are net of transaction feesProceeds received are net of transaction fees

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Bank Credit Card Transactions Sales using bank credit cards are also considered cash transactions Sales using bank credit cards are also considered cash transactions Retailer receives cash directly into bank accountRetailer receives cash directly into bank account Proceeds received are net of transaction feesProceeds received are net of transaction fees Fees are generally higher than debit card feesFees are generally higher than debit card fees

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Mail-in and Electronic Receipts Mail-in receipts: Mail-in receipts: Open mail in presence of two clerksOpen mail in presence of two clerks Stamp cheques “For Deposit Only”Stamp cheques “For Deposit Only” Prepare duplicate cheque list, signed by each clerkPrepare duplicate cheque list, signed by each clerk Electronic receipts: Electronic receipts: On-line banking: cash transferred from customer’s bank account to company’s bank accountOn-line banking: cash transferred from customer’s bank account to company’s bank account Company journalizes from its bank statementCompany journalizes from its bank statement Pre-authorized payments: company initiates payment and automatically journalizesPre-authorized payments: company initiates payment and automatically journalizes

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Control Over Cash Disbursements Made by cheque, EFT or petty cash Made by cheque, EFT or petty cash Responsibility: Responsibility: Only designated individuals can sign chequesOnly designated individuals can sign cheques Segregation of duties: Segregation of duties: Different people approve and make paymentsDifferent people approve and make payments Documentation procedures: Documentation procedures: Use pre-numbered cheques and account for numerical continuityUse pre-numbered cheques and account for numerical continuity Supported by approved invoice or similarSupported by approved invoice or similar

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Control Over Cash Disbursements 2 Physical and IT controls: Physical and IT controls: Secure blank cheques and restrict accessSecure blank cheques and restrict access Print cheques electronically or use writerPrint cheques electronically or use writer Independent checks of performance: Independent checks of performance: Compare cheques to invoicesCompare cheques to invoices Reconcile bank statement regularlyReconcile bank statement regularly Human resources: Human resources: Hire bonded personnelHire bonded personnel

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Petty Cash Fund Used to pay small amounts Used to pay small amounts To establish a petty cash fund: To establish a petty cash fund: Appoint a custodian who is responsible for itAppoint a custodian who is responsible for it Determine the appropriate size of the fundDetermine the appropriate size of the fund

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Petty Cash Fund 2 Making payments from the fund: Making payments from the fund: Usually limited in size and type of transactionUsually limited in size and type of transaction No accounting entry when payment is madeNo accounting entry when payment is made Replenishing the fund: Replenishing the fund: Done when fund reaches some set minimumDone when fund reaches some set minimum Custodian prepares a summary of payments, supported by receipts and other documentsCustodian prepares a summary of payments, supported by receipts and other documents Reviewed and approved independentlyReviewed and approved independently Used as a basis for accounting entryUsed as a basis for accounting entry

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Petty Cash Fund 3 Cash shortage or overage Cash shortage or overage Recognized when fund replenishedRecognized when fund replenished Becomes an expense or revenueBecomes an expense or revenue Fund can be increased (if not large enough) or decreased (if too large) when replenished Fund can be increased (if not large enough) or decreased (if too large) when replenished

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Use of a Bank Account Strengthens internal controls over cash Strengthens internal controls over cash Minimizes the amount of cash on handMinimizes the amount of cash on hand A clearing house for receipts and chequesA clearing house for receipts and cheques Provides a double record of cash transactionsProvides a double record of cash transactions Bank deposits and cheques Bank deposits and cheques Duplicate deposits slips are stamped by bankDuplicate deposits slips are stamped by bank Cheques usually require two authorized signaturesCheques usually require two authorized signatures

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Bank Statement ACCOUNT LEE COMPANYStatement Date/Credit STATEMENT 500 QUEEN STREETLine Closing Date FREDERICTON, NB, E3B 5C2April 30, ACCOUNT NUMBER Balance Deposits and CreditsCheques and Debits Balance Last Statement No.Total Amount This Statement 2034, , , DEPOSITS AND CHEQUES AND DEBITSCREDITSDAILY BALANCE DateNo.AmountDateAmountDateAmount , , , , , , , , , , , , , , , , , , , , ============================================ 4-18NSF , , , DM , Symbols:CMCredit MemoECError CorrectionNSFNot Sufficient FundsReconcile Your DMDebit MemoINTInterest EarnedSCService ChargeAccount Promptly Cheques paid Account balance Deposits received Credit memorandum: For interest, EFT’s and other credits Debit memorandum: For service and other charges (including NSF fee) 13, , , CM , , ,

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Reconciling the Bank Account Bank balance almost never agrees to depositor’s balance Bank balance almost never agrees to depositor’s balance Due to time lags and errors in recording transactionsDue to time lags and errors in recording transactions The two balances must be reconciled The two balances must be reconciled Called preparing a bank reconciliationCalled preparing a bank reconciliation Done by an employee who has no responsibilities related to cashDone by an employee who has no responsibilities related to cash Balance per books and per bank are both reconciled to their adjusted (correct) balance Balance per books and per bank are both reconciled to their adjusted (correct) balance

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Reconciling Items per Bank Balance per bank +Deposits in transit Deposits recorded by depositor that have not been recorded by bankDeposits recorded by depositor that have not been recorded by bank -Outstanding cheques Cheques issued & recorded by company that have not been presented to bankCheques issued & recorded by company that have not been presented to bank ±Bank errors =Adjusted cash balance per bank

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Reconciling Items per Books Balance per books +Credit memoranda Amounts credited to company by bank, such as interest earned, EFT deposits, etc.Amounts credited to company by bank, such as interest earned, EFT deposits, etc. -Debit memoranda Charges levied by bank against depositor’s account – service charges, NSF charges, etc.Charges levied by bank against depositor’s account – service charges, NSF charges, etc. ±Company errors =Adjusted cash balance per books

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Entries from Bank Reconciliation Each reconciling item required to calculate adjusted cash balance per books must be journalized Each reconciling item required to calculate adjusted cash balance per books must be journalized To ensure that these are accounted for by companyTo ensure that these are accounted for by company Each reconciling item required to calculate adjusted cash balance per bank is NOT journalized Each reconciling item required to calculate adjusted cash balance per bank is NOT journalized Will be recorded by bank when receivedWill be recorded by bank when received

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Reporting Cash Cash on the balance sheet includes: Cash on the balance sheet includes: Coins, currency, cheques, money on depositCoins, currency, cheques, money on deposit Bank debit and credit card transactionsBank debit and credit card transactions Cash equivalents: investments with a term of three months or less that are easily soldCash equivalents: investments with a term of three months or less that are easily sold Listed first on the balance sheet, as it is the most liquid Listed first on the balance sheet, as it is the most liquid Bank overdrafts are reported as a liability Bank overdrafts are reported as a liability Restricted cash is reported separately Restricted cash is reported separately

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