Chapter 7

Internal Control and Cash

Financial Accounting: Tools for

Business Decision-Making
Ninth Canadian Edition

Kimmel; Weygandt; Mitchell; Trenholm; Irvine; Burnley

Prepared by Debbie Musil, FCPA, FCMA
Learning Objectives
LO 1: Identify and describe the components of a good
internal control system, including its control
activities and limitations.
LO 2: Apply key control activities to cash receipts and
payments.
LO 3: Prepare a bank reconciliation.
LO 4: Explain the reporting and management of cash.

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Internal Control and Cash
• Internal Control
o Control activities
o Limitations of internal control
o Fraud
• Cash Controls
o Control activities over cash receipts and cash payments
• Bank Accounts – A Key Control
o Online banking, bank statements and reconciling the bank
account
• Reporting and Managing Cash
o Reporting, managing and monitoring cash
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Internal Control (1 of 2)
• The systems adopted within a company to help it
achieve:
o Reliable financial reporting
o Effective and efficient operations
o Compliance with relevant laws and regulations

• Also help prevent and detect errors, which cause

unintentional misstatements
• An effective way to prevent and detect fraud

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Internal Control (2 of 2)
• Good internal control systems have five primary
components:
o Control environment
o Risk assessment
o Control activities
o Information and communication
o Monitoring activities

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Control Activities (1 of 4)
• Control activities include:
o Assignment of responsibility
o Segregation of duties
o Documentation
o Physical controls
o Review and reconciliation
• Specific control activities used by a company will depend
on:
o The risks it is facing, and management’s assessment
o The size and nature of the company
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Control Activities (2 of 4)
• Assignment of Responsibility
o Responsibility should be assigned to specific employees, making
them accountable for carrying out a task appropriately
• Each cashier has responsibility for their own cash drawer
• Segregation of Duties
o Responsibility for authorization and recording of transactions and
custody of assets should be assigned to different individuals
• All purchasing activities (ordering, approving, receiving and
authorizing payment) should not be carried out by the same
employee

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Control Activities (3 of 4)
• Documentation
o Evidence that transactions and events have occurred at
specified times and specified amounts
• Shipping documents indicating goods have been shipped
• Physical Controls
o Safeguarding of assets and enhancing the accuracy and
reliability of accounting records
• Computer passwords, building alarms, security cameras,
safes, vaults

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Control Activities (4 of 4)
• Review and Reconciliation
o Data prepared by employees should be subject to
independent review, both internal and external
• Reconciliation involves the comparison between two more
documents (e.g. Bank reconciliations)

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Limitations of Internal Control
• Can only provide reasonable assurance that assets are
safeguarded and records are reliable
• Limitations include:
o Cost/benefit considerations
o Human error
o Collusion
o Management override

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Fraud
• An intentional act to misappropriate (steal) assets or to
misstate financial information
• Examples of misstatements:
o Recording expenses as assets
o Overstating useful lives of assets
o Recording revenues that do not exist

• Fraud is most likely to occur when the three factors in

the fraud triangle are present – opportunity, pressure,
rationalization

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Fraud Triangle

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Cash Controls
• Cash is highly susceptible to theft
• What is cash?
o Coins, currency, cheques, money orders
o Money on hand or in bank

• General rule: if bank will accept for deposit, it is

considered cash

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Control Activities over Cash Receipts (1
of 2)
• Over-the-counter Receipts, cheque, and electronic
funds transfer (EFT) receipts
• Internal control over cash receipts is more effective
when cash receipts are deposited into the bank
account daily or are made by electronic funds transfer

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Control Activities over Cash Receipts (2
of 2)

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Control Activities over Cash Payments
(1 of 2)
• Control activities over cash payments are more
effective when payments are made by cheque or by
electronic funds transfer (EFT), rather than in cash

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Control Activities over Cash Payments
(2 of 2)

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Bank Accounts – A Key Control Activity
• A company safeguards cash by using a bank rather than
keeping cash on hand
• Provides a second record of transactions
o One by the company
o One by the bank

• These two accounts can be reconciled

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Online Banking
• Most companies utilize online banking
• Authorized employees can monitor balances and
transactions in real-time
• Enables companies to
o Transfer funds between accounts
o Make online payments for invoice, payroll or taxes
o Deposit cheques online
o View account transactions and balance details at any time
o Download transactions directly, facilitating bank
reconciliations
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Understanding Debits and Credits

Bank Books
(Your Cash Account is a (Cash is an Asset to the
Liability to the Bank) Company)
Cheque Debit (decrease) Credit (decrease)
Deposit Credit (increase) Debit (increase)

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Differences Between Company Records
and Bank Statement
• Timing differences that result in one of the parties
recording the transaction before the other is aware of it
o The period after a cheque is written and dated but not
yet presented to or paid by the bank (outstanding
cheques)
o The period between receipts (deposits) being recorded
by the company and receipts being recorded by the bank
(deposits in transit)
• Errors made by either party in recording transactions

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Reconciling the Bank Account
• Reconcile the balance per the bank statement with the
company’s cash balance per the general ledger
(“books”)
• Both the books and bank balance are reconciled to
their adjusted (correct) cash balance
o Adjusted cash balance = reconciled balance

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Bank Reconciliation Procedures (1 of 3)

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Bank Reconciliation Procedures (2 of 3)
Reconciling items Cash Balance per Bank:
• Determining deposits in transit at end of period

• Determining outstanding cheques at end of period

• Bank errors (+ / −)
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Bank Reconciliation Procedures (3 of 3)
Reconciling items to Cash balance per Company’s books:
• EFT collections, interest earned and other deposits (+)
o For example, EFT collection from customer on account if
not previously recorded
• EFT payments, service charges, and NSF cheques (−)
o For example, bank service charges
• Book errors (+ / −)

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Bank Reconciliation

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Bank Reconciliation Journal Entries
Bank Reconciliation Journal Entries:
• Company’s Books
o Each reconciling item in determining the adjusted
balance per books MUST be journalized and posted
• Bank
o Do NOT journalize any entries on bank side

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Reporting Cash (1 of 2)
• Cash is reported in both the statement of financial
position and the statement of cash flows
o Statement of cash flows shows the receipts and
payments of cash
• Cash is the most liquid asset and is listed first in the
current assets section of the statement of financial
position

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Reporting Cash (2 of 2)
• Cash can be combined with cash equivalents
o Short-term highly liquid held-for-trading investments
that are subject to insignificant risk of changes in value
• If cash is in a deficit or overdraft at year-end, it is
reported as a current liability called bank indebtedness

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Principles of Cash Management

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IFRS and ASPE Review

Key Differences International Financial Accounting Standards for Private

Reporting Standards (IFRS) Enterprises (ASPE)
No Significant differences.

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Copyright
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