2. INTERNAL CONTROL AND CASH UNIT 7

3. 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. INTERNAL CONTROL

4. 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. Authorization Segregation of duties Documentation procedures Safeguarding assets and records Independent verification ILLUSTRATION 8-1 PRINCIPLES OF INTERNAL CONTROL

6. 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. PRINCIPLES OF INTERNAL CONTROL

7. 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. PRINCIPLES OF INTERNAL CONTROL

8. 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. PRINCIPLES OF INTERNAL CONTROL

9. Independent Internal Verification ILLUSTRATION 8-3 RELATIONSHIP BETWEEN SEGREGATION OF DUTIES AND INDEPENDENT INTERNAL VERIFICATION ILLUSTRATION 8-3 RELATIONSHIP BETWEEN SEGREGATION OF DUTIES AND INDEPENDENT INTERNAL VERIFICATION Accounting Employee AAssistant Cashier B Assistant Comptroller C Maintains cash balances Maintains custody of per books cash on hand Makes monthly comparisons: reports any irreconcilable differences to comptroller Segregation of Duties

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

11. 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. CASHCASH

12. 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 CONTROL OVER CASH RECEIPTS

13. 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. CONTROL OVER CASH RECEIPTS

14. 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. CONTROL OVER CASH RECEIPTS

15. 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. CONTROL OVER CASH DISBURSEMENTS

16. Prenumbered 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. CONTROL OVER CASH DISBURSEMENTS

17. Each cheque should be compared with the approved invoice before it is issued. Following payment, the approved invoice should be stamped PAID. Paid CONTROL OVER CASH DISBURSEMENTS

18. 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. PETTY CASH FUND

19. 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. USE OF A BANK

20. 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. REPORTING CASH

21. 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. CASH EQUIVALENTS