Sarbanes Oxley Internal Control Cash ACG 2021 Chapter 7 Sarbanes Oxley Act of 2002 This act is considered one of the most important and significant laws affecting publicly held companies in recent history Publicly held companies are those traded on public exchanges Purpose is to restore public confidence and trust in the financial statements of companies Emphasizes the importance of internal control Internal Control as the procedures and processes used by a company to safeguard its assets process information accurately and ensure compliance with laws and regulations Requires companies to maintain strong and effective internal controls over the recording of transactions and preparation of financial statements To deter fraud and prevent misleading financial statements Requires companies and their independent accountants to report on the effectiveness of the company s internal controls Sarbanes Oxley Caused by Enron Worldcom Tyco Internal Controls are the policies and procedures that protect assets from misuse ensure that business information is accurate ensure that laws and regulations are being followed Objectives of Internal Controls Provides reasonable assurance that Assets are safeguarded and used for business purposes Business information is accurate Employees comply with laws and regulations Elements Control environment Risk assessment Control procedures Monitoring Information and communication Control procedures Competent personnel Rotating duties Mandatory vacations Separating responsibilities Separating operations Proof and security measures Cash Controls over Receipts and Payments Cash includes coins currency checks money orders and money on deposit Businesses may have more than one cash account Operating account Payroll account Savings account Control of Cash Receipts To protect cash from theft and misuse a business must control cash from the time it is received until it is deposited in a bank Two main sources of cash Customers purchasing products or services Customers making payments on account Cash Received from Cash Sales Regardless of the source of cash receipts every business must properly safeguard and record its cash receipts Cash registers help minimize risk Change fund amount in each drawer at the beginning of a shift Cash in Register Cash register Change fund monies at the start of the shift At the end of the day monies in the register may not equal what is should be Short too little an expense to the business Over too much revenue to the business Recording of Difference Cash short and over New account Classification depends on balance Short Debit expense Over Credit revenue Cash Short and Over Example Cash sales show 2 000 and cash in drawer is 2 005 Date Account Cash Cash short and over Sales PR Debit Credit 2 005 5 2 000 Cash short and Over Example 2 Suppose that cash sales are 3 500 and cash in drawer is 3 400 Cash short and Over Cash short Over Debit Credit Short Over Results in expense Results in revenue Cash Control over Receipts Cash Received by Mail Lock box Cash controls Cash Received by EFT EFT electronic funds transfers Most companies encourage automatic electronic transfers by customers Term used in the auditor s opinion of the internal control environment Less costly Enhance internal controls Control of Cash Payments Control of cash payments should provide reasonable assurance that payments are made for only authorized transactions Voucher system Set of procedures for authorizing and recording liabilities to pay cash or issue an electronic funds transfer Cash paid by EFT Payroll systems Bank Accounts and Bank Reconciliation Bank accounts are used for control purposes Reduces the amount of cash on hand at any one time Provide independent recording of cash transactions Facilitates the transfer of funds Terminology Bank statement a summary of transactions Credit increase in bank balance ACH automated clearing house entry for EFT MS miscellaneous credit Debit decrease in bank balance NSF not sufficient funds check SC service charge ACH automated clearing house entry for EFT Bank Reconciliation The reasons for the difference between the cash balance on the bank statement and the cash balance in the accounting records should be analyzed by preparing a bank reconciliation It is an analysis of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger in order to determine the adjusted cash balance Bank Reconciliation Steps in Bank Reconciliation Compare deposits on the bank statements with the ledger Compare checks on the bank statements with the ledger Add credit memo that have not been recorded to the balance according to the company s records Deduct debit memo that have not been recorded form the balance according to the company s records List any errors discovered during the preceding steps 7 5 Bank s records Company s records 2 549 99 3 359 78 Beginning balance Add note and interest 816 20 collected by bank 408 00 4 175 9 2 957 9 Deduct outstanding 8 9 Deduct check checks NSF 300 00 No 812 1 061 00 Bank service No 878 435 39 charges 18 00 No 883 48 60 1 544 99 Error recording Check No 879 9 00 327 00 Adjusted balance 2 630 99 Adjusted balance 2 630 99 Beginning balance Add deposit not recorded by bank 51 Bank Reconciliation for Power Networking 7 5 52 7 5 Entry to Record Plus Items July 31 Cash 408 00 Notes Receivable 400 00 NoteIncome collected by bank Interest 8 00 55 7 5 Entry to Record Minus Items July 31 Cash Notes Receivable 400 00 Note collected by bank Interest Income 8 00 31 Accounts Receivable Thomas Ivey Miscellaneous Expense Accounts Payable Taylor Co Cash NSF check bank service charges and error in recording Check no 879 408 00 300 00 18 00 9 00 327 00 57 Example Deposit on July 31 not recorded on bank statement 816 20 Checks outstanding No 12 1 061 00 No 8 435 39 No 3 48 60 Note plus interest of 8 collected by the bank 408 00 Check from customers return by bank because of insufficient funds 300 00 Bank service charge 18 Check No 23 recorded as 723 26 when it was actually 732 26 Bank balance on statement 3359 78 Book balance per general ledger 2549 99 Do a bank reconciliation and prepare entries Petty Cash Fund for small cash expenses Supplies Postage Food Parking Petty Cash is an asset account Petty Cash Entries Establish the fund Check written to petty cash for 500 Dat e Account Petty cash Cash PR Debit Credit 500 500 Petty Cash Entries Reimburse the