1. WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 7 Internal Control and Cash Prepared by: Debbie Musil Kwantlen Polytechnic University 1

2. Internal Control and Cash Copyright John Wiley & Sons Canada, Ltd.2 Internal control – Fraud – Internal controls and activities – Limitations of internal control Cash controls – Internal controls over cash receipts and payments Using a bank – Using a bank account Reporting cash

3. Copyright John Wiley & Sons Canada, Ltd.3 Chapter 7: Internal Control and Cash Study Objectives 1.Explain the activities that help prevent fraud and achieve internal control. 2.Apply control activities to cash receipts and cash payments. 3.Describe the control features of a bank account. 4.Report cash on the balance sheet.

4. Copyright John Wiley & Sons Canada, Ltd.4 An intentional dishonest act Results in personal financial benefit by: – Misappropriating (stealing) assets, or – Misstating financial statements Three factors that contribute to fraud: – Opportunity to commit fraud – Financial pressure – Rationalization (justify their actions) Fraud

5. Internal Control Copyright John Wiley & Sons Canada, Ltd.5 Related methods and measures that management designs and implements to help achieve: – Reliable financial reporting – Effective and efficient operations – Compliance with laws and regulations Effective internal control systems have five basic components: – Control environment – Risk assessment – Control activities – Information and communication – Monitoring

6. Internal Control Systems Copyright John Wiley & Sons Canada, Ltd.6 Control environment – Create a culture that values clear rules and expects everyone to follow the rules Risk assessment – Identify and analyze factors that create risk, and determine how to manage Control activities – Design policies and procedures to address the risks faced by the company

7. Internal Control Systems 2 Copyright John Wiley & Sons Canada, Ltd.7 Information and communication – Identify, collect and communicate relevant information to appropriate parties Monitoring – Identifying and reporting problems to appropriate levels where action can be taken

8. Control Activities Copyright John Wiley & Sons Canada, Ltd.8 Establishment of responsibility – Make specific employees responsible for specific tasks, including authorization Segregation of duties – Duties are divided in a manner that eliminates the ability to commit a fraud and cover it up Documentation procedures – Rules covering the handling and control of documents (such as pre-numbering)

9. Control Activities 2 Copyright John Wiley & Sons Canada, Ltd.9 Physical and IT controls – Over access to and use of assets and records Independent checks of performance – Reviews of records and performance by independent employees or external parties Human resource controls – Bonding, rotation of duties, requiring vacations, background checks

10. Limitations of Internal Control Copyright John Wiley & Sons Canada, Ltd.10 Reasonable assurance: cost of internal control should not be more than expected benefit Human element: fatigue, carelessness, indifference, 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

11. Copyright John Wiley & Sons Canada, Ltd.11 1.Explain the activities that help prevent fraud and achieve internal control. 2.Apply control activities to cash receipts and cash payments. 3.Describe the control features of a bank account. 4.Report cash on the balance sheet. Chapter 7: Internal Control and Cash Study Objectives

12. Cash Controls Copyright John Wiley & Sons Canada, Ltd.12 Effective control over cash is essential to: – Safeguard cash – Ensure the accuracy of accounting records Types of cash receipts: – Over-the-counter – Bank debit and credit card transactions – Mail-in receipts – Receipts via electronic funds transfer (EFT)

13. Control Over Cash Receipts Copyright John Wiley & Sons Canada, Ltd.13 Responsibility: – Only designated personnel are authorized to handle cash receipts Segregation of duties: – Different individuals receive and record cash receipts, have custody of cash Documentation procedures: – Use remittance advices, cash register tapes, deposit slips

14. Control Over Cash Receipts 2 Copyright John Wiley & Sons Canada, Ltd.14 Physical controls: – Store cash in safes and bank vaults – Limit access – Use cash registers – Deposit cash daily Independent checks of performance: – Daily cash counts and comparisons of receipts Human resource controls: – Bonding; require vacations

15. Debit Card Transactions Copyright John Wiley & Sons Canada, Ltd.15 Sales using debit cards are considered cash transactions – Retailer receives cash directly into bank account at some regular interval (e.g. daily) – Proceeds received are net of transaction fees

16. Bank Credit Card Transactions Copyright John Wiley & Sons Canada, Ltd.16 Sales using bank credit cards are also considered cash transactions – Retailer receives cash directly into bank account – Proceeds received are net of transaction fees Fees are generally higher than debit card fees

17. Mail in & Electronic Receipts Copyright John Wiley & Sons Canada, Ltd.17 Mail-in receipts: – Open mail in presence of two clerks – Remittance slips sent to Accounting independently of cash Electronic receipts: – On-line banking: cash transferred from customer’s bank account to company’s bank account – Company journalizes from its bank statement – Pre-authorized payments: company initiates payment and automatically journalizes

18. Control Over Cash Payments Copyright John Wiley & Sons Canada, Ltd.18 Made by cheque, EFT or petty cash Establish responsibility: – Only designated individuals can sign cheques Segregation of duties: – Different people approve and make payments Documentation procedures: – Use pre-numbered cheques and account for numerical continuity – Supported by approved invoice or similar

19. Control Over Cash Payments 2 Copyright John Wiley & Sons Canada, Ltd.19 Physical and IT controls: – Secure blank cheques and restrict access – Print cheques electronically or use writer Independent checks of performance: – Compare cheques to invoices – Reconcile bank statement regularly Human resources: – Hire bonded personnel

20. Copyright John Wiley & Sons Canada, Ltd.20 1.Explain the activities that help prevent fraud and achieve internal control. 2.Apply control activities to cash receipts and cash payments. 3.Describe the control features of a bank account. 4.Report cash on the balance sheet. Chapter 7: Internal Control and Cash Study Objectives

21. Copyright John Wiley & Sons Canada, Ltd.21 Strengthens internal controls over cash – Minimizes the amount of cash on hand – A clearing house for receipts and cheques – Provides a double record of cash transactions Bank deposits and cheques – Duplicate deposits slips are stamped by bank – Cheques usually require two authorized signatures Bank reconciliation compares bank’s balance with company’s balance and explains any differences (Should be removed) Use of a Bank Account

22. Bank Statement Copyright John Wiley & Sons Canada, Ltd.22

23. Copyright John Wiley & Sons Canada, Ltd.23 1.Explain the activities that help prevent fraud and achieve internal control. 2.Apply control activities to cash receipts and cash payments. 3.Apply control activities to cash payments. 4.Describe the control features of a bank account. Chapter 7: Internal Control and Cash Study Objectives

24. Reporting Cash Copyright John Wiley & Sons Canada, Ltd.24 Cash on the balance sheet includes: – Coins, currency, cheques, money on deposit – Bank debit and credit card transactions – Cash 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 Bank overdrafts are reported as a liability Restricted cash is reported separately

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