1. Prepared by: Keri Norrie, Camosun College
ACCOUNTING PRINCIPLES
Third Canadian Edition
Prepared by: Keri Norrie, Camosun College

2. INTERNAL CONTROL AND CASH
CHAPTER 7
INTERNAL CONTROL AND CASH

3. INTERNAL CONTROL
Internal control consists of the policies and procedures adopted within a business in order to:
1. optimize resources, and
2. prevent and detect errors and irregularities.

4. INTERNAL CONTROL
Internal control consists of the policies and procedures adopted within a business in order to:
3. Safeguard its assets
4. Maintain the accuracy and reliability of its accounting records

5. PRINCIPLES OF INTERNAL CONTROL Illustration 7-1
Authorization
Segregation of duties
Documentation procedures
Safeguarding assets and records
Independent verification

6. PRINCIPLES OF INTERNAL CONTROL
Authorization of transactions and activities: Authorization by the proper individual is important. Control is most effective when only one person is responsible for a given task.
Segregation of duties: The work of one employee should provide a reliable basis for evaluating the work of another employee.

7. PRINCIPLES OF INTERNAL CONTROL
Documentation procedures: Documents should provide evidence that transactions and events have occured.
Safeguards to control access to, and use of, assets and records: Physical, mechanical, and electronic controls relate primarily to the safeguarding of assets and enhancing accuracy and reliability of the accounting records.

8. PRINCIPLES OF INTERNAL CONTROL
Independent verification:
External verification indicates whether the company’s financial statements fairly present its financial position and results of operations in accordance with GAAP.
Internal verification involves review, comparison, and reconciliation of information from two sources.

9. RELATIONSHIP BETWEEN SEGREGATION OF DUTIES AND INDEPENDENT INTERNAL VERIFICATION
Maintains cash balances cash on hand
Accounting Employee A
Maintains custody over books
Assistant Cashier B
Independent Internal Verification
Makes monthly comparisons: reports any irreconcilable differences to comptroller
Assistant Comptroller C

10. LIMITATIONS OF INTERNAL CONTROL
Cost/benefit
Collusion
Size of business
Human element

11. CASH
Cash includes coins, currency, cheques, money orders, and money on hand or on deposit at a bank or similar depository.
Internal control over cash is imperative in order to safeguard cash and assure the accuracy of the accounting records for cash.

12. CONTROL OVER CASH RECEIPTS
Only designated personnel should be authorized to handle or have access to cash receipts.
Different individuals should:
1. receive cash
2. record cash receipt transactions
3. have custody of cash

13. CONTROL OVER CASH RECEIPTS
Documents should include: 1. remittance advices 2. cash register tapes 3. deposit slips
Cash should be stored in safes and bank vaults.
Access to storage areas should be limited to authorized personnel.
Cash registers should be used in executing over-the-counter receipts.

14. CONTROL OVER CASH RECEIPTS
Daily cash counts and daily comparisons of total receipts should be made.
All personnel who handle cash receipts should be bonded and required to take vacations.
An important tool in control of over-the-counter receipts is cash registers that are visible to customers.

15. CONTROL OVER CASH DISBURSEMENTS
Payments are made by cheque rather than by cash, except for petty cash transactions.
Only specified individuals should be authorized to sign cheques.
Different departments or individuals should be assigned the duties of approving an item for payment and paying it.

16. CONTROL OVER CASH DISBURSEMENTS
Pre-numbered cheques should be used and each cheque should be supported by an approved invoice or other document.
Blank cheques should be stored in a safe. 1. Access should be restricted to authorized personnel.
2. A cheque writer machine should be used to imprint the amount on the cheque in indelible ink.

17. CONTROL OVER CASH DISBURSEMENTS
Each cheque should be compared with the approved invoice before it is issued.
Following payment, the approved invoice should be stamped PAID.
Electronic payments should be authorized and verified by a person independent of the accounts payable department.
Paid

18. PETTY CASH FUND
A petty cash fund is used to pay relatively small amounts.
Operation of the fund, often called an imprest system, involves 1. establishing the fund, 2. making payments from the fund, and 3. replenishing the fund.
Accounting entries are required when 1. the fund is established, 2. the fund is replenished, and 3. the amount of the fund is changed.

19. ESTABLISHING THE FUND G E N R A L J O U D a t e c o u n T i l s d x p b C r M . 1 P y h T o e s t a b l i s h a p e t t y c a s h f u n d .
When the fund is established, a cheque payable to the petty cash custodian is issued for the stipulated amount.

20. REPLENISHING THE FUND
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
Mar. 15
Postage Expense
Merchandise Inventory
Miscellaneous Expense
Cash
To replenish petty cash fund.
On March 15 the petty cash custodian requests a cheque for $87. The fund contains $13 cash and petty cash receipts for postage, $44, freight, $38, and miscellaneous expenses, $5.

21. REPLENISHING THE FUND
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
Mar. 15
Postage Expense
Merchandise Inventory
Miscellaneous Expense
Cash Over and Short
Cash
To replenish petty cash fund.
On March 15 the petty cash custodian requests a cheque for $88. The fund contains $12 cash and petty cash receipts for postage, $44, freight, $38, and miscellaneous expenses, $5.

22. USE OF A BANK
The use of a bank minimizes the amount of currency that must be kept on hand and contributes significantly to good internal control over cash.
A company can safeguard its cash by using a bank as a depository and clearing house for cheques received and cheques written.

23. BANK STATEMENTS A bank statement shows:
1. cheques paid and other debits charged against the account
2. deposits and other credits made to the account
3. account balance after each day’s transactions
ACCOUNT
W. A. LEE COMPANY
Statement Date/Credit
STATEMENT
500 QUEEN STREET
Line Closing Date
FREDERICTON, NB, E3B 5C2
April 30, 2005
457923
ACCOUNT NUMBER
Balance
Deposits and Credits
Cheques and Debits
Balance
Last Statement
No.
Total Amount
Total Amount
This Statement
13,256.90 20
34,805.10 26
32,154.55
15,907.45
DEPOSITS AND
CHEQUES AND DEBITS
CREDITS
DAILY BALANCE
Date
No.
Amount
Date
Amount
Date
Amount
4-2
435
644.95
4-2
4,276.85
4-2
16,888.80
4-5
436
3,260.00
4-3
2,137.50
4-3
18,249.65
4-4
437
1,185.79
4-5
1,350.47
4-4
17,063.86
4-3
438
776.65
4-7
982.46
4-5
15,154.33
4-8
439
1,781.70
4-8
1,320.28
4-7
14,648.89
4-7
440
1,487.90
4-9 CM
1,036.00
4-8
11,767.47
4-8
441
2,420.00
4-11
2,720.00
4-9
12,802.47
4-11
442
1,585.60
4-12
757.41
4-11
13,936.87
4-12
443
1,226.00
4-13
1,218.56
4-12
13,468.28
=================
==============
=============
4-29
NSF
425.60
4-27
1,545.57
4-27
13,005.45
4-29
459
1,080.30
4-29
2,929.45
4-29
14,429.00
4-30 DM
30.00
4-30
2,128.60
4-30
15,907.45
4-30
461
620.15
Symbols: CM
Credit Memo EC
Error Correction
NSF
Not Sufficient Funds
Reconcile Your DM
Debit Memo
INT
Interest Earned SC
Service Charge
Account Promptly

24. RECONCILING THE BANK ACCOUNT
Reconciliation is necessary because the balance per bank and balance per books are seldom in agreement due to time lags and errors.
A bank reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash.

25. TERMS Deposits in transit
PowerPoint Slides
TERMS
Deposits in transit
Deposits recorded by depositor that have not been recorded by bank
Outstanding cheques
Cheques written (issued) and recorded by company that have not been presented to/paid by bank
Adjusted balance
Reconciled or correct cash balance 29

26. TERMS
Debit memoranda
Charges against depositor’s account (e.g. service charges, RC (returned)/NSF (insufficient funds) cheques)
Credit memoranda
Amounts that increase depositor’s account (e.g., interest earned)

27. BANK RECONCILIATION PROCEDURES Illustration 7-8
$ Per Bank Statement
-outstanding cheques
+deposits in transit
+/- bank errors
= correct cash amount
$ Per Books
-NSF cheques
-cheque printing or other service charges
+notes collected by
bank
+/- book errors

28. Reconciling Journal Entries
Books
Each reconciling item in determining the adjusted balance per books MUST be journalized and posted
Bank
Do NOT journalize any entries on bank side

29. REPORTING CASH Cash reported on the Balance Sheet includes:
1. Cash on hand
2. Cash in banks
3. Petty cash
Cash is listed first in the balance sheet because it is the most liquid asset.

30. CASH EQUIVALENTS
Cash equivalents are highly liquid investments, with maturities of three months or less when purchased, that can be converted into a specific amount of cash.
Examples include money market funds, short-term notes, and treasury bills.

31. USING THE INFORMATION IN THE FINANCIAL STATEMENTS
Most important asset
Pervasive impact
Vulnerable to theft or misuse
Balancing act needed to ensure sufficient, but not excess, quantity

32. USING THE INFORMATION IN THE FINANCIAL STATEMENTS
Cash Flow Statement: shows where cash came from and what is was used for.
Management report: states management’s responsibility for internal controls.

33. COPYRIGHT
Copyright © 2004 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.