1 Sarbanes Oxley Internal Control and Accounting for the asset Cash Chapter 5 A200 Survey of Accounting University of Tennessee Fall 2015 2 Internal Controls Risk The probability that some event will adversely affect the business Management needs to effectively balance risks and controls No one ever checks on this I really need the money The boss doesn t pay me what I m worth Everybody does it 3 Objectives of Internal Control Accurate Reliable Financial Reporting Supported by proper application of Accounting concepts Ch 1 Objectivity Historical cost Matching Accounting Period Adequate Disclosure Compliance with Laws and Regulations GAAP environmental regulations safety regs financial regs tax law Effectiveness and Efficiency of Operations Safeguard assets Assure that assets are used for business purposes 4 Internal Control Sarbanes Oxley SOX Act 1 Federal Law passed by U S Congress in 2002 to regulate publicly held companies 2 Addressed multi million dollar scandals in 1999 2002 Adelphia Qwest AOL Time Warner Tyco Enron WorldCom Global Crossing 3 Requires companies to maintain effective internal controls Imposes criminal penalties for destroying records retaliating against whistleblowers or tampering with witnesses 4 Requires companies to report on effectiveness of internal controls 5 Created the PCAOB Public Company Accounting Oversight Board to tighten up corporate financial reporting and internal controls and protect investors 5 Elements of Internal Control 1 Control environment 2 Risk assessment 3 Control procedures a b c d Hire competent employees Rotate employee duties Enforce mandatory employee vacations Separate responsibilities for related functions 1 Operations and recording results of operations 2 Handling assets and recording accounting for assets e Proofs and security measures Travel authorizations Physical security systems 4 Monitoring a Employee behavior b Accounting system breakdowns 5 Information and communication feedback 6 7 Internal Controls over Cash Receipts cash in Protect cash receipts Separate duties when receiving cash Handling cash cash received in person by mail by EFT Recording amount received Use Cash Short and Cash Over Accounts Reveals differences between recorded cash sales and actual cash in the drawer Cash Short is a miscellaneous expense on the income statement Cash Over is other income on the income statement Prepare a monthly bank reconciliation Verify the company s record of cash receipts against the bank s record of the company s cash receipts 8 Internal Controls over Cash Receipts cash in Cash Short and Over An account used to highlight errors between actual cash received and cash sales recorded Transaction 1 Sales recorded on register tape for the day 2 000 Cash in register drawer at the end of the day 1 974 STATEMENT OF CASH FLOWS 1 974 Cash in Operating INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET Assets Cash 1 974 Liabilities Equity Retained Earnings 1 974 2 000 Sales Revenue 26 Misc Expense 9 Internal Controls over Cash Receipts cash in Cash Short and Over An account used to highlight errors between actual cash received and cash sales recorded Transaction 2 Sales recorded on register tape for the day 2 000 Cash in register drawer at the end of the day 2 035 STATEMENT OF CASH FLOWS Assets Cash 2 035 Cash in Operating INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET 2 035 Liabilities Equity Retained Earnings 2 035 2 000 Sales Revenue 35 Other Income 10 Internal Controls over Cash Disbursements cash out Protect cash disbursements Separate duties when paying cash Making the payment cash paid in person by check by EFT Recording amount paid Use a Voucher System Written authority for every cash disbursement Use a Petty Cash fund for small cash disbursements Prepare a monthly bank reconciliation Verify the company s record of cash disbursements against the bank s record of the company s cash disbursements 11 Internal Control over Cash in and out Bank Account Companies hire a Bank to Physically protect the company s cash Keep records of company s cash in receipts and out disbursements Internal Control over Cash in and out Monthly Bank Reconciliation The monthly bank reconciliation Resolves differences in bank s version of company s cash in out and company s version of cash in out Can reveal misappropriation theft of cash 12 Internal Control over Cash Monthly Bank Reconciliation Bascom Company has its account with Third National Bank At the end of April 2014 TNB sends to Bascom a statement that says 4 30 14 Cash balance per Bank 5 290 38 Note receivable collected by Bank for Bascom 2 500 00 Bank service charge 15 00 NSF check returned by Bank to Bascom Co 61 23 Bascom Company has this information in its accounting records 4 30 14 Cash balance per Books 3 734 54 Outstanding checks 576 30 Deposits in transit 1 561 23 Error A check written for 456 payment of utility bill was recorded as 564 in check register Error A deposit of 356 was recorded by the bank as 365 13 Internal Control over Cash monthly bank reconciliation Bascom Co Bank Reconciliation 4 30 14 Bank 4 30 14 Balance Book 5 290 38 4 30 14 Balance Outstanding Checks Deposits in Transit Bank Error Adjusted Cash 3 734 54 576 30 1 561 23 9 00 6 266 31 Note receivable collected 2 500 00 Bank service charge 15 00 NSF Check returned 61 23 Book Error Adjusted Cash 108 00 6 266 31 14 Financial Statement reporting of Cash Cash consists of Coins Currency including Petty Cash Check Money orders Money on deposit immediately available Cash Equivalents are extremely short term investments of cash in Money market funds U S Treasury bills Commercial paper money loaned to other corporations Report C CE on the Balance Sheet as a single figure in Current Assets Report details of C CE in footnotes to the financial statements