Slide 1Internal ControlsObjectives of Internal ControlInternal Control: Sarbanes-Oxley (SOX) ActElements of Internal ControlSlide 6Internal Controls over Cash Receipts (cash in)Slide 8Slide 9Internal Controls over Cash Disbursements (cash out)Internal Control over Cash in and out - Bank AccountInternal Control over Cash – Monthly Bank ReconciliationSlide 13Financial Statement reporting of Cash1Sarbanes-Oxley,Internal Control, andAccounting for the asset CashChapter 5A200 - Survey of AccountingUniversity of TennesseeFall 20152Internal ControlsRisk: 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 “Everybody does it”what I’m worth” Good internal controls decrease risk.3Objectives of Internal ControlAccurate & Reliable Financial ReportingSupported by proper application of Accounting concepts (Ch. 1)Objectivity Historical costMatchingAccounting PeriodAdequate DisclosureCompliance with Laws and RegulationsGAAP, environmental regulations, safety regs, financial regs, tax lawEffectiveness and Efficiency of Operations Safeguard assetsAssure that assets are used for business purposes4Internal Control: Sarbanes-Oxley (SOX) Act1. Federal Law passed by U.S. Congress in 2002 to regulate publicly-heldcompanies2. 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 againstwhistleblowers, 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 investors5Elements of Internal Control1. Control environment2. Risk assessment 3. Control procedures a. Hire competent employees b. Rotate employee duties c. Enforce mandatory employee vacations d. 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 systems4. Monitoring a. Employee behavior b. Accounting system breakdowns5. Information and communication (feedback)67Internal 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 receivedUse 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 statementPrepare a monthly bank reconciliation–Verify the company’s record of cash receipts against the bank’s record of the company’s cash receiptsInternal 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 = $1,9748STATEMENT OF CASH FLOWS BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGSAssets = Liabilities + EquityCash Retained Earnings1,974 Cash in Operating 1,974 = 1,9742,000 Sales Revenue ( 26) Misc. ExpenseInternal 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 = $2,035STATEMENT OF CASH FLOWS BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGSAssets = Liabilities + EquityCash Retained Earnings2,035 Cash in Operating 2,035 = 2,0352,000 Sales Revenue 35 Other Income910Internal 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 paidUse a Voucher System –Written authority for every cash disbursementUse a Petty Cash fund for small cash disbursementsPrepare a monthly bank reconciliation–Verify the company’s record of cash disbursements against the bank’s record of the company’s cash disbursements11Internal Control over Cash in and out - Bank AccountCompanies 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 ReconciliationThe 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 cash12Internal Control over Cash – Monthly Bank ReconciliationBascom Company has its account with Third National Bank. At the end ofApril 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. = $61.23Bascom 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 $365.13Internal Control over Cash – monthly bank reconciliation Bascom Co.Bank Reconciliation4-30-14Bank4-30-14 Balance $ 5,290.38 Outstanding Checks ( 576.30) Deposits in Transit 1,561.23Bank Error (9.00) Adjusted Cash $ 6,266.31Book 4-30-14 Balance $ 3,734.54Note receivable collected 2,500.00Bank service charge (15.00) NSF Check returned (61.23) Book Error 108.00 Adjusted Cash $ 6,266.3114Financial Statement reporting of CashCash consists of: