1. Internal Control and
Managing Cash
Chapter 4

2. system of internal control.
Set up an effective
system of internal control.

3. Internal Control Safeguard assets. Promote operational efficiency.
It is the organizational plan and all the
related measures that an entity adopts.
Encourage Adherence to company policies.
Safeguard assets.
Ensure Accurate and reliable accounting records.
Promote operational efficiency.

4. Components of an Effective System
Competent, reliable, and ethical personnel
Assignment of responsibilities
Authorization
Recording
Custody
Separation of duties

5. Separation of Duties Separation of the Authorization of transactions
from the Recording of transactions
from the Custody of assets

6. Internal and External Audits
An audit is an examination by an outside party
of the company’s financial statements,
accounting systems, and internal controls.
An internal auditor is an employee of the business.
An external auditor is an independent auditor.

7. Business documents and records include:
invoices (bills)
paid checks
accounting journals
accounting ledgers

8. Electronic and Computer Controls
Businesses use electronic devices to safeguard assets.

9. The Onion Model of E-Commerce System Security
Sensitive
Hardware,
Software,
and Data
Encryption
Firewalls
Intrusion detection devices
Incident response procedures
Audits by external specialists

10. Encryption It is the transformation of data by a mathematical
process into a form that is unreadable by anyone
who does not have the secret decryption key.
Same key
Clear
message
Encryption
Encoded
Decryption

11. Firewall Internet Passwords Other codes
It is a technique that limits access to hardware,
software, or data to persons within a network.
Inquirers
Customers
Hackers
Firewall 1
Firewall 2
Firewall 3
Internet
Passwords
Other codes

12. Other Controls – Fireproof vaults – Burglar alarms
– Point of sale terminals
– Frequent bank deposits
– Mandatory vacations
– Job rotation

13. The Limitations of Internal Control
Systems designed to thwart one person’s
fraud can be beaten by two or more
employees working together –
colluding – to defraud the firm.
A system of internal control that is too
complex can be inefficient.

14. Use a bank reconciliation
as a control device.

15. The Bank Reconciliation
There are two records of a business’s cash:
the company’s cash account
on its own books, and… 1
the bank statement, which shows the
actual amount of cash in the bank. 2

16. The Bank Reconciliation
Two common items that cause differences
between the bank balance and the book balance.
1. Items recorded by the company but not yet
recorded by the bank:
– Deposits in transit
– Outstanding checks

17. The Bank Reconciliation
2. Items on a bank statement and not
recorded by the business:
– Bank collections
– Electronic funds transfers
– Service charge
– Interest revenue earned on account
– NSF checks
– Errors

18. Bank Reconciliation Illustrated
The bank statement of Business Research, Inc.,
shows a balance of $5, on January 31.
The company Cash account on the
books has a balance of $3,
The following reconciling items
explain why the two balances differ:

19. The Bank Reconciliation Illustrated
1. The January 30 deposit of $1,591.63
does not appear on the bank statement.
2. The bank erroneously charged to the
account a $100 check (No. 656) not
written by Business Research Associates.
3. Five company checks issued late in
January and recorded in the journal
have not been paid by the bank.

20. The Bank Reconciliation Illustrated
Check No Date Amount
Jan $
Total $1,350.14

21. The Bank Reconciliation Illustrated
4. The bank received $ by EFT
on behalf of Business Research, Inc.
5. The bank collected on behalf of the
company a note receivable, $2,114
(including interest revenue of $214).
6. The bank statement shows interest
revenue of $28.01.

22. The Bank Reconciliation Illustrated
7. Check number 333 for $150 paid to Brown Company
on account was recorded as a cash payment of $510.
8. The bank service charge for the month was $14.25.
9. The bank statement shows an NSF check for $52.
10. Business Research pays insurance expense by
EFT and has not recorded this $361 payment.

23. The Bank Reconciliation Illustrated
Balance per bank, January 31 $5,931.51
Add deposit in transit ,591.63
Check erroneously charged
$7,623.14
Less outstanding checks –1,350.14
Adjusted bank balance $6,273.00

24. The Bank Reconciliation Illustrated
Balance per books, January $3,294.21
Add: ETF receipt of rent revenue
Collection of note receivable ,114.00
Interest revenue earned
Correction of book error
$6,700.25
Less: Service charge $
NSF check
Payment of insurance expense –
Adjusted book balance $6,273.00

25. Apply internal controls
to cash receipts and
cash payments.

26. Controlling and Managing Cash
Internal control over cash receipts ensures
that all cash receipts are deposited in the
bank and no collections are lost.

27. Over the Counter Receipts
The point-of-sale terminal (cash register) offers
control over the cash received in a store.

28. Mail Receipts All incoming mail should be opened
by a mailroom employee.
This person should compare the check
received with the remittance advice.
The mailroom clerk keeps a running
total of cash receipts for the day.

29. Mail Receipts Many companies use a lock-box system.
Customers send checks directly to an
address that is essentially a bank account.

30. Internal Controls Over Cash Receipts
Element of
Internal Control
Internal Controls over
Cash Receipts
Competent, reliable,
ethical personnel
Carefully screen and
train employees.
Proper authorization
Only designated employees can
grant exceptions for customers.

31. Internal Controls Over Cash Receipts
Separation of duties
Employees who handle cash do not
have access to accounting records.
Internal: management policies
External: control over cash receipts
Internal and
external audits
Electronic and
computer controls
Match receipts with remittances
and bank deposit ticket daily.

32. Internal Control: Payments Purchasing Process
Purchase request
(requisition)
Sales
department
Purchasing
Business Document
Prepared by
Sent to
Purchase order
Purchasing
department
Supplier
Invoice (bill)
Supplier
Accounting
department
Receiving report
Receiving
department
Accounting
Disbursement
packet
Accounting
department
Officer who
signs the check

33. Internal Control: Payments Disbursement Packet
Purchase Request
Purchase Order
Receiving Report
Invoice
Disbursement Packet

34. Internal Controls Over Cash Payments
Element of
Internal Control
Internal Controls over
Cash Payments
Competent, reliable,
ethical personnel
Payments entrusted to high level
employees and the treasurer.
Proper authorization
Large expenditures must be
authorized by top management.

35. Internal Controls Over Cash Payments
Separation of duties
Employees who handle checks have
no access to accounting records.
Internal: management policies
External: control over cash payments
Internal and
external audits
Electronic and
computer controls
Computer programmers do not
operate the computers.

36. Use a budget to
manage cash.

37. Using a Budget to Manage Cash
A budget is a financial plan that
helps coordinate business activities.
A cash budget helps a company,
or an individual, manage cash by
planning the receipt and payment
of cash during a future period.

38. Cash Budget Example 1. Cash balance, February1, 20x2 $ 202.6
Estimated cash receipts:
2. Collections from customers ,858.3
3. Interest and dividends on investments
4. Sale of store fixtures
$3,072.0
Estimated cash payments:
5. Purchases of inventory $1,906.2
6. Operating expenses
7. Expansion of existing stores
8. Opening of new stores
9. Payment of long-term debt
Payment of dividends ,385.9
11. Net cash position at January 31, 20x (111.3)
12. Budgeted / Desired cash balance, January 31, 20x
13. Additional cash needed to meet desired 1/31/x3 balance $
Cash Budget For the Year Ended January 31, 20x3
(In millions)

39. Reporting Cash on the Balance Sheet
Companies usually combine all cash amounts
into a single total called “Cash and Cash
Equivalents” on the balance sheet.
Cash equivalents include liquid assets…
Time deposits
Certificates of deposit

40. Reporting Cash on the Balance Sheet
America Online, Inc.
Consolidated Balance Sheet
December 31 Excerpts
(In Millions)
Assets
Current assets:
Cash and cash equivalents $2,610
Short-term investments
Accounts receivable

41. Weigh ethical judgment in
business.

42. Ethics and Accounting Most large companies have a code of ethics
designed to encourage ethical and
responsible behavior by employees.
Accountants have additional
incentives to behave ethically.
AICPA Code of Professional Conduct
Standards of Ethical Conduct
for Management Accountants

43. Ethics and Accounting Conflict of Interest Business transactions
Enron
Corporation
A. Fastow, CEO
Outside
Partnership
A. Fastow,
Principal
Business
transactions

44. End of Chapter 4