1. Sarbanes-Oxley, Internal Control, and Cash
Chapter 8
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2. Learning Objective 1
Describe the Sarbanes-Oxley Act of and its impact on internal controls and financial reporting.

3. LO 1
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (often referred to simply as Sarbanes-Oxley) applies only to companies whose stock is traded on public exchanges. Its purpose is to restore public confidence and trust in the financial statements of companies.
Sarbanes-Oxley requires companies to maintain strong and effective internal controls over the recording of transactions and the preparing of financial statements.
(These elements will be learned in details in auditing courses).

4. Learning Objective 2
Describe the Sarbanes-Oxley Act of and the impact on internal controls and financial reporting.
Describe and illustrate the application of internal controls to cash.

5. Cash Controls Over Receipts and Payments
LO 3
Cash Controls Over Receipts and Payments
Cash includes coins, currency (paper money), checks, and money orders. Money on deposit with a bank or other financial institution that is available for withdrawal is also considered cash. Cash is the asset most likely to be stolen or used improperly in a business.

6. Control of Cash Receipts
Businesses normally receive cash from two main sources:
Customers purchasing products or services
Customers making payments on account
One of the most important controls to protect cash received in over-the-counter sales is a cash register.

7. Control of Cash Receipts
Salespersons may make errors in making change for customers. As a result, the amount of cash on hand may differ from the amount of cash sales. Such differences are recorded in a Cash Short and Over account.

8. Cash Received from Cash Sales
LO 3
Cash Received from Cash Sales
Cash sales for May 3 totaled $35,690 per the cash register tape. After removing the change fund, only $35,668 was left in the cash drawer. The cash sales and shortage would be recorded as follows:
If there had been cash over, Cash Short and Over would have been credited for the overage.

9. Cash Received in the Mail and by EFT
LO 3
Cash Received in the Mail and by EFT
Cash is received in the mail when customers pay their bills. Most companies design their invoices so that customers return a portion of the invoice, called a remittance advice, with their payment.
Cash may also be received from customers through electronic funds transfers (EFT). Customers may authorize automatic electronic transfers from their checking accounts to pay monthly bills.

10. LO 3
Voucher System
A voucher system is a set of procedures for authorizing and recording liabilities and cash payments. It may be either manual or computerized.

11. Learning Objective 3
Describe the Sarbanes-Oxley Act of and the impact on internal controls and financial reporting.
Describe and illustrate the application of internal controls to cash.
Petty cash.

12. Used for minor expenditures. Replenished periodically.
Petty Cash
Used for minor expenditures.
Petty cash fund
Sometimes, a quick disbursement is needed for minor expenditures. Going through all of the approval processes needed to have a check prepared is a waste of both management and clerical time. Companies usually keep a small amount of cash on hand to use for small, immediate needs.
Here is how a petty cash system works. The company cashier processes a check for the petty cash amount and gives it to the petty cash custodian. The accountant makes an entry to debit petty cash and credit cash for the amount of the check. The petty cash custodian takes the check to the bank and cashes it. The cash is brought back and placed in a secure location. As petty cash is needed, the petty cash custodian supplies the cash for the purchases Receipts supporting the petty cash disbursements are given to the petty cash custodian. . When the petty cash fund is close to depletion, the petty cash custodian takes the receipts to the company cashier and requests a check in that amount to replenish the petty cash fund. When the check is issued, the accountant makes an entry to debit the expenses or assets indicated on the receipts and credits cash.
Let’s look at a petty cash example.
Has one custodian.
Replenished periodically.

13. Petty Cash
Hawthorne Co. established a petty cash fund on May 1 by writing a check for $200 to the petty cash custodian.
Prepare the May1st journal entry to record the establishment of the fund.
Part I.
Hawthorne Co. established a petty cash fund on May 1 by writing a check for $200 to the petty cash custodian. Prepare the May1st journal entry to record the establishment of the fund.
Part II.
The journal entry to establish the petty cash fund is a debit to the asset petty cash and a credit to the asset cash for $200.

14. Petty Cash
During May, the petty cash custodian paid bills using cash from the fund totaling $160 as follows:
Postage $40
Office supplies 35
Delivery charges 55
Entertainment 30
Prepare the May 31 journal entry to record replenishing the fund.
Dr. Postage expense 40
Dr. Office supplies expense 35
Dr. Delivery expense
Dr. Entertainment expense
Cr. Petty Cash
Part I.
During May, Hawthorne’s petty cash custodian paid bills using cash from the fund totaling $160 as follows:
Postage $40
Office supplies 35
Delivery charges 55
Entertainment 30
Prepare the May 31 journal entry to record replenishing the fund
Part II.
We debit each expense account for the amount on the receipts and credit cash for $160 to replenish the fund to $200. .
Dr. Petty Cash
Cr. Cash

15. Learning Objective 4
Describe and illustrate the use of a bank reconciliation in controlling cash.

16. LO 4
Bank Statement
A summary received from the bank (usually monthly) of all checking account transactions is called a bank statement. It shows the beginning balance, additions, deductions, and the ending balance.

17. Bank Reconciliation
Explains the difference between cash reported on bank statement and cash balance on company’s books.
A bank reconciliation explains the difference between cash reported on the bank statement and cash recorded on the company’s books in its cash account. The amounts are different because of timing differences. For example the company may have written a check that reduced the cash balance on the company’s books, but the check has not cleared the bank at the bank statement date. In addition to arriving at the correct cash balance amount, a bank reconciliation will provide us with information for adjusting entries to bring the book balance of cash to the correct balance.

18. Bank Reconciliation Bank Balance Book Balance + Bank Collections
+ Deposits in Transit
- Service Charges
- NSF Checks
- Outstanding Checks
There are two sides to a bank reconciliation. We always add the deposits in transit to the bank balance, deduct any checks outstanding at the bank statement date, and add or subtract bank errors as necessary.
On the book’s side, we start with the cash balance in the ledger and add collections made by the bank on our behalf, deduct customer checks that were drawn on accounts that were nonsufficient, deduct bank service charges, add any interest earned, and add or subtract errors that we made as necessary. Examples of collections made by the bank on our behalf are when the bank acts as a collection box for customer payments or when the bank collects a note receivable for us from a customer
± Bank Errors
± Book Errors
= Corrected Balance
= Corrected Balance

19. Bank Reconciliation
Balance per Bank
+ Deposits in Transit
- Outstanding Checks
± Bank Errors
= Adjusted Balance
All reconciling items on the book side require an adjusting entry to the cash account.
Book Balance
+ Bank Collections
- Service Charges
- NSF Checks
All reconciling items on the book balance side require an adjusting entry to the cash account. The adjustments change the general ledger cash balance to the corrected cash balance.
Let’s look at an example of a bank reconciliation.
± Book Errors
= Corrected Balance

20. Let’s prepare a May 31 bank reconciliation for the Hawthorne Company.
The May 31 bank statement indicated a balance of $34,680.
The cash general ledger account on that date shows a balance of $35,276.
Additional information necessary for the reconciliation is shown on the next screen.
On May 31, Hawthorne Company’s bank statement listed a balance of $34,680 dollars. Hawthorne’s cash general ledger account on that date had a balance $35,276.
On the next screen you will see information necessary for the May 31 bank reconciliation.

21. Bank Reconciliation
- Cash receipts not yet deposited on May 31 totaled $2,965.
- A $1,020 check mailed to the bank for deposit had not reached the bank at the statement date.
- Outstanding checks totaled $5,536.
- A check written to pay for raw materials purchased on account cleared the bank for $1,790 but was erroneously recorded at $790 by the accoutant of the company.
- The bank statement showed $80 in service charges in May.
- The bank returned NSF checks in the amount of $2,187 received as payment on accounts receivable.
- The bank collected a note receivable for $1,120 that included $120 of interest.
Here are the seven items necessary to prepare Hawthorne’s May reconciliation:
 Cash receipts not yet deposited on May 31 totaled $2,965.
 A $1,020 check mailed to the bank for deposit had not reached the bank at the statement date.
 Outstanding checks totaled $5,536.
 A check written to pay for raw materials purchased on account cleared the bank for $1,790 but was erroneously recorded at $790.
 The bank statement showed $80 in service charges in May.
 The bank returned nonsufficient funds (NSF) checks in the amount of $2,187 received as payment on accounts receivable.
 The bank collected a note receivable for $1,120 that included $120 of interest.
At this point you should decide if these items are bank reconciling items or book reconciling items. Then you should decide if the items should be added or subtracted from the bank or book balances.

22. Bank Reconciliation
Now we re ready to complete the book side of the reconciliation. We start with the $34,680 cash balance from the ledger. To this balance we add the $1,120 note collected by the bank for the company. Then we deduct the $80 of bank service charges. The next item we deduct is the $2,187 of nonsufficient funds checks. The company accepted checks from customers that turned out to be drawn on accounts that did not have sufficient funds. When the checks were received, the company recorded them as an increase in cash, but now we need to decrease cash. The last item that we have to deduct is the $1,000 recording error. The company recorded a $1,790 cash payment on account as a $790 cash payment. After these adjustments, we arrive at the corrected cash balance of $33,129.

23. Bank Reconciliation
Prepare the entries to adjust the cash at bank account in the book to the corrected balance.
Part I.
Prepare the entries to adjust the cash account to the corrected balance.
Part II.
We only make adjusting entries for the items on the book side of the reconciliation. First, we debit cash for $1,120 that the bank collected for the company. The credit side of this entry is $1,000 to notes receivable and $120 for the interest earned on the note.
Second, we debit miscellaneous expense for the $80 bank service charge; debit accounts receivable to create an account for the $2,187 of nonsufficient fund checks received; debit accounts payable for the $1,000 recording error; and credit cash for $3,267.

24. Sarbanes-Oxley, Internal Control, and Cash
The End