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Lecture 7 F (Internal Control and Cash)

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31 views27 pages

Lecture 7 F (Internal Control and Cash)

Uploaded by

Sk Nasir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 8

Internal Control and


Cash
CHAPTER 8
INTERNAL CONTROL AND CASH
After studying this chapter, you should be able to:
1 Define internal control.
2 Identify the principles of internal control.
3 Explain the applications of internal control principles to
cash receipts.
4 Explain the applications of internal control principles to
cash disbursements.
5 Prepare a bank reconciliation.
INTERNAL CONTROL
STUDY OBJECTIVE 1

Internal Control
1. Safeguards an organization’s assets
2. Enhances the accuracy and
reliability of accounting records
PRINCIPLES OF INTERNAL
CONTROL
STUDY OBJECTIVE 2
PRINCIPLES OF
INTERNAL CONTROL

• Establishment of responsibility:
• 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
• Documentation procedures:
• documents provide evidence that transactions and
events have occurred
PRINCIPLES OF
INTERNAL CONTROL

• Physical, mechanical, and electronic controls:


safeguarding of assets and enhancing accuracy and
reliability of the accounting records.
• Independent internal verification:
the review, comparison, and reconciliation of
information from two sources.
• Other controls:
bonding of employees who handle cash, rotating
employee’s duties, and requiring employees to take
vacations.
PHYSICAL, MECHANICAL, AND
ELECTRONIC CONTROLS

 Locked warehouses and storage cabinets for


inventories and records
 Safes, vaults, and safety deposit boxes for
cash and business papers
 Time clocks for recording time worked
 Computer facilities with pass key access
 Alarms to prevent break-ins
 Television monitors and garment sensors to
deter theft
PHYSICAL, MECHANICAL, AND
ELECTRONIC CONTROLS
INDEPENDENT INTERNAL
VERIFICATION
Maximum benefit
Independent internal verification:

1 Made on periodic or surprise basis


2 Should be done by someonewho is
independent of the employee responsible for
the information
3 Report discrepancies and exceptions to a
management level that can take appropriate
corrective action
COMPARISON OF SEGREGATION OF DUTIES
PRINCIPLE WITH INDEPENDENT INTERNAL
VERIFICATION PRINCIPLE
LIMITATIONS OF INTERNAL
CONTROL
 Costs of establishing control procedures
should not exceed their expected benefits
 The human element is an important factor in every
system of internal control.
• A good system can become ineffective through
employee fatigue, carelessness, or indifference.
 Collusion may result.
• Two or more individuals work together to get around
prescribed controls and may significantly impair the
effectiveness of a system.
CASH

 Cash
• Coins, currency, checks, money orders,
and money on hand or on deposit at a bank
or similar depository
 Internal control over cash is imperative
• Safeguards cash and assure the accuracy
of the accounting records for cash
CONTROL OVER CASH
RECEIPTS
STUDY OBJECTIVE 3

• 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

• 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

• Daily cash counts and daily comparisons of total receipts.


• All personnel who handle cash receipts should be bonded
and required to take vacations.
• Control of over-the-counter receipts is centered on cash
registers that are visible to customers.
CONTROL OVER CASH
DISBURSEMENTS
STUDY OBJECTIVE 4

• Payments are made by check rather


than by cash, except for petty cash
transactions.
• Only specified individuals should
be authorized to sign checks.
• Different departments or individuals
should be assigned the duties of approving
an item for payment and paying it.
CONTROL OVER CASH
DISBURSEMENTS
 Prenumbered checks should be used and
each check should be supported by an
approved invoice or other document.
 Blank checks should be stored in a safe.
1 Access should be restricted to authorized
personnel.
2 A check writer machine should be used
to imprint the amount on the check in
indelible ink.
CONTROL OVER CASH
DISBURSEMENTS

 Each check should be compared with


the approved invoice before it is issued.
 Following payment, the approved
invoice should be stamped “PAID”.
USE OF A BANK
STUDY OBJECTIVE 6

 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 as a
clearing house for checks
received and checks written.
WRITING CHECKS

 A check is a written order signed by the


depositor directing the bank to pay a specified
sum of money to a designated recipient.
 Three parties to a check are:
1 Maker (drawer) issues the check
2 Bank (payer) on which check is drawn
3 Payee to whom check is payable
WRITING CHECKS
BANK STATEMENTS

A bank statement shows:


1 Checks 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
MEMORANDA

 Bank debit memoranda


• Indicate charges against the
depositor’s account.
Example: ATM service charges
 Bank credit memoranda
• Indicate amounts that will increase
the depositor’s account.
Example: interest income on account
balance
RECONCILING THE BANK
ACCOUNT
 Reconciliation
• Necessary as 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.

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