1. Chapter 7 Internal Control and Cash
Prepared by:
Debbie Musil
Kwantlen University College

2. Agenda
Learning goals
Vocabulary
Chapter 7-internal controls and cash

3. Learning Goals
Explain the activities that help achieve internal control
Apply control activities to cash receipts
Apply control activities to cash disbursements
Operate and account for a petty cash fund
Describe the control features of a bank account
Prepare a bank reconciliation
Report cash on the balance sheet

4. Vocabulary Bank overdraft Credit memoranda Internal auditors
Bank service charge
Internal control
Debit memorandum
Not sufficient funds
Bank statement
Deposits in transit
Cash equivalents
Outstanding cheques
Electronic funds transfer
Cash receipts journal
Petty cash fund
Restricted cash
External auditors
Clearing
Segregation of duties
Fidelity insurance
Compensating balances

5. Internal Control
Internal control : is the process that management design and implements to help an organization achieve:
Reliable financial reporting
Effective and efficient operations
Compliance with relevant laws and regulation

6. Control Activities Establishment of responsibility
Specific employees responsible for specific tasks
Segregation of duties
Duties need to be divided so one person can not committee a fraud and cover it up.
Documentation procedures (rules)
Documents give evidence that transaction and events have happened.

7. Control Activities Physical controls Performance reviews
Over access to and use of assets and records
Such as safes, locks…time clocks
Performance reviews
Internal reviews by independent employees or internal audit
Independent external reviews by external auditors
Other controls
Bonding, rotation of duties, requiring vacations
Bonding means getting insurance protection called fidelity insurance – against theft of assets by dishonest employees

8. Limitations of Internal Control
Cost/benefit: a system of internal control can only give reasonable assurance
Human element: fatigue, carelessness, lack of training
Collusion: two or more employees working together to overcome segregation control
Size of business: effective controls are more difficult in smaller organizations

9. Control Over Cash Receipts
Look on page 348 illustration 7-3
Responsibility
Segregation of duties
Documentation procedures:
Use remittance advices, cash register tapes, deposit slips
Physical controls:
Store cash in safes and bank vaults
Limit access
Use cash registers
Performance reviews:
Daily cash counts and comparisons of receipts
Other controls:
Deposit cash daily; bonding; require vacations

10. Debit Card Transactions
Credit Card Transactions

11. Mail-in Receipts
When billing customers, many companies state “Pay by cheque; do not send cash through the mail.” This is done to reduce the risk of cash receipts being misappropriated when they are received.

12. Electronic Receipts
ETF : Electronic Fund Transfer, system transfer funds between parties without the use of paper. Example: debit and bank credit cards, online banking, preauthorized monthly payment.
Record it by debiting cash and credit sales

13. Control Over Cash Disbursements
Made by cheque, EFT or petty cash
Responsibility: only designated individuals can sign cheques
Segregation of duties:
Different people approve and make payments
Documentation procedures:
pre-numbered cheques and account for numerical continuity
Supported by approved invoice or similar
Physical controls:
Secure blank cheques,restrict access, print cheques electronically or use writer
Performance reviews:
Compare cheques to invoices
Reconcile bank statement regularly
Other controls:
Stamp invoices PAID

14. Petty Cash Fund Used to pay small amounts Establish a petty cash fund:
Making payments from the fund:
No accounting entry when payment is made

15. Petty Cash Fund 2 Replenishing the fund:
Prepares a summary of payments, supported by receipts and other documents
Used as a basis for accounting entry

16. Practice Questions
BE7-1 – 7
E7-3+4

17. Reconciling the Bank Account
Bank balance almost never agrees to depositor’s balance
Due to time lags and errors in recording transactions
The two balances must be reconciled
Called preparing a bank reconciliation
Done by an employee who has no responsibilities related to cash
Balance per books and per bank are both reconciled to their adjusted (correct) balance

18. Reconciling Items Balance per books Balance per bank
+ Deposits in transit
Deposits recorded by depositor that have not been recorded by bank
- Outstanding cheques
Cheques issued & recorded by company that have not been presented to bank
± Bank errors
= Adjusted cash balance per bank
Balance per books
+ Credit memoranda
Amounts credited to company by bank, such as interest earned
- Debit memoranda
Charges levied by bank against depositor’s account – service charges, NSF charges, etc.
± Company errors
= Adjusted cash balance per books

19. Entries from Bank Reconciliation
Each reconciling item required to calculate adjusted cash balance per books must be journalized
To ensure that these are accounted for by company
Each reconciling item required to calculate adjusted cash balance per bank is NOT journalized
Will be recorded by bank when received

20. Important terms
Clearing: a term used when a cheque or deposit is accepted by the maker’s bank.
Bank statement: shows the depositor’s bank transaction and balances
Bank charge: a monthly fee the bank charger for it’s service
Debit memorandum: document explaining the charges on the bank statement

21. Important terms
NSF (not sufficient funds): is when the issuer of the cheque doesn’t have enough money in the bank to fulfill the obligatory amount.
Credit memoranda (CM): identify interest earned on the bank account, electronic funds….
Outstanding cheques: cheques recorded by a company that have not yet cleared the bank.
Deposits in transit: deposits recorded by the company that have not yet been recorded by the bank.

22. Reporting Cash
Cash: consistent of coins, currency, cheques, money orders, travellers cheques, and money on deposit in a bank.
The general rule is if the bank accepts it for deposit = cash
Cash and petty cash is reported together as cash on the balance sheet

23. Reporting Cash
Cash equivalents: are short term, highly liquid investments. Usually mature in 3 months

24. Reporting Cash
Bank overdraft: occurs when withdrawals or payments are more than the amount in the bank, becomes a temporary liability
Restricted cash: cash that has a restricted use, such as cash being held for the purchase of real estate.
Compensating balances: is when a bank makes a loan they might require you to keep a minimum balance

25. Using Financial Statement Information
Management must properly manage cash:
Too little cash and cannot pay bills when due
Too much cash is not productive
Cash flow statement
Helps assess the management of cash
Management report
States management’s responsibility for internal controls

26. Practice Questions
E7-11, 12, 13
P 7-4A