CHAPTER 7 - SARBANES-OXLEY, INTERNAL CONTROL, CASH Material Copyright- Protected: Janice Stoudemire and Barbara wagers
Chapter 7 SARBANES-OXLEY, INTERNAL CONTROL, CASH Learning Objectives 1. Sarbanes-Oxley 2. Internal Controls 3.Cash Internal Controls 4. Bank Accounts 5. Bank Reconciliation 6. Omit 7. Balance Sheet Cash Presentation
MEET YOUR GUIDE:
ANDY GRIFFITH SHOW TRIVIA How many times did Barney wear a dress? 3
ANDY GRIFFITH SHOW TRIVIA How many times did Barney accidentally fired his pistol? 8 3 into courthouse floor 1 into courthouse ceiling 2 into the air 1 into Andy's front porch 1 into a tire on a squad car.
DESCRIBE THE SARBANES-OXLEY ACT OF 2002 AND ITS IMPACT ON INTERNAL CONTROLS AND FINANCIAL REPORTING
SARBANES-OXLEY WHY WAS IT PASSED? RESTORE PUBLIC CONFIDENCE, TRUST IN FINANCIAL STATEMENTS Public outcry from scandals Only companies whose stock is publicly traded
SARBANES-OXLEY WHAT DOES IT REQUIRE? EFFECTIVE INTERNAL CONTROLS Maintain strong, effective internal controls - deter fraud, prevent misleading financial statements Report on effectiveness of company s internal controls file with SEC
DESCRIBE AND ILLUSTRATE THE OBJECTIVES AND ELEMENTS OF INTERNAL CONTROL
INTERNAL CONTROLS Policies and procedures a company uses to (sace): Safeguard assets Produce reliable accounting records and business info Encourage compliance with policies and laws Promote efficiency
INTERNAL CONTROLS Designed to give REASONABLE assurance that errors and irregularities will be prevented or detected on a timely basis
FIVE ELEMENTS OF INTERNAL CONTROL Control environment Risk assessment Control procedures Monitoring Information and Communication
CONTROL ENVIRONMENT Overall attitude, awareness, actions of management towards controls Management s philosophy and operating style Organizational structure
RISK ASSESSMENT Identifying risks and taking actions to control them
CONTROL PROCEDURES Separation of duties for related operations why? Separation of duties for operations, custody of assets, accounting why? Sound personnel policies Proofs and security measures Authorization and approval Reconciliation Restricted access, physical security Physical counts
MONITORING Warning signs from employee behavior Warning signs from accounting system
INFORMATION AND COMMUNICATION
LIMITATIONS OF INTERNAL CONTROL Errors and irregularities MAY still occur! Human error, collusion, dishonesty, misunderstanding, errors in judgment, carelessness Cost-benefit
DESCRIBE AND ILLUSTRATE THE APPLICATION OF INTERNAL CONTROLS TO CASH
INTERNAL CONTROLS OVER CASH Why SO Important? Cash is the most vulnerable asset!
INTERNAL CONTROLS OVER CASH Separation of duties for ARC Authorizing, Recording, Custody Why?
INTERNAL CONTROLS OVER CASH Other Control Procedures Limit access to cash Limit cash on hand Bonding
INTERNAL CONTROLS OVER CASH Physical protection Surprise cash counts Prompt recording/deposits Using checks Bank reconciliation
CONTROL OF CASH CASH RECEIPTS
CONTROL OF CASH CASH RECEIPTS Preventative versus Detective controls what s the difference?
CONTROL OF CASH CASH RECEIPTS General Controls: 1) Record cash receipts immediately 2) Urge customers to pay by check 3) Separation of duties
CONTROL OF CASH RECEIVED IN MAIL (ON ACCOUNT) One employee: Compares cash received to remittance advice Restrictively endorses checks Sends cash to cashier for deposits it and sends copy of deposit slip to Accounting Department Sends remittance advices to Acc. Department to record and reconcile
CONTROL OF CASH RECEIVED IN MAIL (ON ACCOUNT) Independent person reconciles list of receipts to cash deposits on bank statement Cashier handles cash; Accounting Department records cash (good separation of duties)
CONTROL OF CASH RECEIVED FROM CASH SALES Remind customers to get receipt Cash registers or renumbered sales tickets Customer can see amount
CONTROL OF CASH RECEIVED FROM CASH SALES At end of shift, clerk and supervisor count cash and reconcile to register Send cash to cashier, who deposits it and sends copy of deposit slip to Acc. Dpt. Send register receipts to Acc. Dpt. to record journal entry and reconcile with amount deposited
DISCREPANCIES IN CASH What happens when you don t actually have as much cash in the cash drawer as you should have (per the register tape?) Use the account Cash Short and Over!
DISCREPANCIES IN CASH Are you short? Debit Cash Short and Over (like expense) Are you over? Credit Cash Short and Over (like revenue)
DISCREPANCIES IN CASH Journal entry: Cash (amount in drawer) Cash Short & Over (for shortage) Cash Short & Over (for overage) Sales (amount per register tape)
DISCREPANCIES IN CASH Balance in Cash Short and Over goes on Income Statement as: EXPENSE if it had DEBIT balance OR REVENUE if it had CREDIT balance at end of the period.
DISCREPANCIES IN CASH - EXAMPLE Barney Fife s cash register shows sales of $500, but only $491 is in the cash drawer. Are we over or short? $500 491 = $9 short
DISCREPANCIES IN CASH - EXAMPLE Journal entry Cash ( ) 491 Cash Short and Over 9 Sales ( ) 500
DISCREPANCIES IN CASH - EXAMPLE Barney Fife s cash register shows sales of $500, but $504 is in the cash drawer. Are we over or short? $500 504 = $4 over
DISCREPANCIES IN CASH - EXAMPLE Journal entry Cash ( ) 504 Sales ( ) 500 Cash Short and Over 4
HONEWORK: EXERCISE 7-12 EXERCISE 7-13 Recording cash sales
CASH RECEIVED FROM EFT Less costly than receiving cash Better internal controls - not handled by employees Speeds up processing of receipts
CONTROL OF CASH CASH PAYMENTS
INTERNAL CONTROL FOR PURCHASING AND PAYING FOR GOODS AND SERVICES PURCHASE ORDER
CONTROL OF PURCHASING Concerns: unauthorized purchases Key: proper documentation and authorization (separation of duties) Houghton Mifflin
INTERNAL CONTROL FOR PURCHASING AND PAYING FOR GOODS AND SERVICES Check Invoice SUPPLIER Deposit Ticket BANKING SYSTEM 3 7 Goods Purchase Order THE COMPANY 2 PURCHASING DEPARTMENT Purchase Requisition 1 REQUESTING DEPARTMENT Goods 4 RECEIVING DEPARTMENT Purchase Order Copy Receiving Report ACCOUNTING DEPARTMENT 5 Check Authorization (with documentation) 6 TREASURER Monthly Bank Statement
VOUCHER SYSTEM Procedures, journals, forms to provide increased controls over cash payments Audit trail" of evidence Separates the duties of Authorizing expenditures Receiving goods/services Ensuring accuracy/validity of liabilities before paying them Paying expenditures
VOUCHER SYSTEM When expense incurred, prepare voucher - prenumbered form on which we document: Verified ACCURACY, VALIDITY of expenditure Expenditure has been AUTHORIZED for payment ACCOUNTS in which to record
VOUCHER SYSTEM Attach supporting documentation Voucher serves as "permission slip" to authorize payment for expenditure later Checks can be written only for APPROVED and AUTHORIZED vouchers
CASH PAID BY EFT Pay bills via computers Includes direct depositing of employee paychecks
HOMEWORK: EXERCISE 7-3 EXERCISE 7-10 PROBLEM 7-1A Identify internal control weakness
DESCRIBE THE NATURE OF A BANK ACCOUNT AND ITS USE IN CONTROLLING CASH
FEATURES OF BANK ACCOUNT Signature card Deposit ticket (receipt from bank) Check prenumbered, preprinted, encoded Drawer (maker) versus Payee Transaction Register Remittance Advice Bank Statement Multiple accounts
HOW DOES USE OF BANK ACCT. IMPROVE CONTROLS? Double record of transactions one by company, another by bank Can reconcile these two records but by who?
DESCRIBE AND ILLUSTRATE THE USE OF A BANK RECONCILIATION IN CONTROLLING CASH
BANK RECONCILIATION Provides control over cash Cash account balance on the books rarely agrees with that on the bank statement.
BANK RECONCILIATION Timing differences between when items are recorded on our books and when they are appear on the Bank Statement Must reconcile the bank and books to determine the true cash balance
ADJUSTMENTS Who do we make the adjustment to? Bank or books? Whoever is WRONG regarding the item!!
SAMPLE RECONCILIATION Balance per BANK Add: Adjustments Equals: Subtotal Less: Adjustments Adjusted bank balance Balance per BOOKS Add: Adjustments Equals: Subtotal Less: Adjustments Adjusted book balance XX XX XX XX XX XX XX XX XX XX
Power Networking Bank Reconciliation July 31, 2003 Balance per bank statement $3,359.78 Add deposit of July 31, not recorded by bank 816.20 $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Adjusted balance $2,630.99 Balance per company s books $2,549.99 Add note and interest collected by bank 408.00 $2,957.99 Deduct: Check NSF check returned $300.00 Bank service charges 18.00 Error in recording Check No. 879 9.00 327.00 Adjusted balance $2,630.99
ADJUSTMENTS TO MAKE TO BOOKS Adjustments will be made to the BOOK balance when our BOOKS are WRONG regarding an item Be careful of the bank s use of debit & credit
ADJUSTMENTS TO ADD TO BOOKS Items bank has correctly recorded as increasing cash, but we haven t recorded them on our books yet Interest earned Note Receiv. collected by bank Errors we made that understate cash on books (overstate check or understate deposit) Why ADD these?
ADJUSTMENTS TO SUBTRACT FROM BOOKS Items bank has correctly recorded as decreasing cash, but we haven t recorded them on our books yet Bank Service Charges NSF Checks Errors we made that overstate cash on books (understate check or overstate deposit) Why SUBTRACT these?
ADJUSTMENTS TO MAKE TO BANK Adjustments will be made to the BANK balance when the BANK is WRONG regarding an item
ADJUSTMENTS TO ADD TO BANK Items WE have correctly recorded as INCREASING cash, but the bank has NOT recorded them yet Deposits in transit Bank errors that UNDERSTATE cash at bank Why ADD these?
ADJUSTMENTS TO SUBTRACT FROM BANK Items WE have correctly recorded as DECREASING cash, but the bank has NOT recorded them yet Outstanding checks Bank errors that OVERSTATE cash at bank Why SUBTRACT these?
BANK RECONCILIATION Errors may occur by the bank or company and require reconciliation.
BANK RECONCILATION - EXAMPLE
ANDY GRIFFITH SHOW TRIVIA How many stoplights are there in Mayberry? 1 How many miles does Aunt Bea have on her car? 145,000
BANK RECONCILIATION Balance per Barney s Bank St. on 12/31/2018 $4,000 Bank Balance per Barney s Books on 12/31/2018 $1,500 Note ($1,000) plus interest ($30) collected by bank for Barney $1,030 Bank service charges $10 Deposits not credited by bank (made 12/31/2018) $540
BANK RECONCILIATION PER THE BANK Balance per Bank, 12/31/2018 $4,000
BANK RECONCILIATION Balance per Barney s Bank St. on 12/31/2018 $4,000 Balance per Barney s Books on 12/31/2018 $1,500 Note ($1,000) plus interest ($30) collected by bank for Barney $1,030 Bank service charges $10 Deposits not credited by bank (made 12/31/2018) $540
BANK RECONCILIATION PER THE BOOKS Balance per Company s Books 12/31/18 $1,500
BANK RECONCILIATION Balance per Barney s Bank St. on 12/31/2018 $4,000 Balance per Barney s Books on 12/31/2018 $1,500 Note ($1,000) plus interest ($30) collected by bank for Barney Books - add $1,030 Bank service charges $10 Deposits not credited by bank (made 12/31/2018) $540
BANK RECONCILIATION PER THE BOOKS Balance per Company s Books 12/31/18 $1,500 Add: Note and interest collected by bank $1,03 0
BANK RECONCILIATION Balance per Barney s Bank St. on 12/31/2018 $4,000 Balance per Barney s Books on 12/31/2018 $1,500 Note ($1,000) plus interest ($30) collected by bank for Barney Books - add $1,030 Bank service charges Books - subtract $10 Deposits not credited by bank (made 12/31/2018) $540
BANK RECONCILIATION PER THE BOOKS Balance per Company s Books 12/31/18 $1,500 Add: Note and interest collected by bank $1,030 Subtract: Bank service charges $ 10
BANK RECONCILIATION Balance per Barney s Bank St. on 12/31/2018 $4,000 Balance per Barney s Books on 12/31/2018 $1,500 Note ($1,000) plus interest ($30) collected by bank for Barney Books - add $1,030 Bank service charges Books - subtract $10 Deposits not credited by bank (made 12/31/2018) Bank - add $540
BANK RECONCILIATION PER THE BANK Balance per Bank, 12/31/2018 $4,000 Add: Deposit in transit $540
BANK RECONCILIATION Customer's check (from Opie) returned NSF Books - subtract $100 Checks Barney wrote that haven t cleared the bank $2,288 Check charged to Barney in error by the bank $200
BANK RECONCILIATION PER THE BOOKS Balance per Company s Books 12/31/18 $1,500 Add: Note and interest collected by bank $1,030 Subtract: Bank svc. charges $ 10 NSF check 100
BANK RECONCILIATION Customer's check (from Opie) returned NSF Books - subtract $100 Checks Barney wrote that haven t cleared the bank Bank - subtract $2,288 Check charged to Barney in error by the bank $200
BANK RECONCILIATION PER THE BANK Balance per Bank, 12/31/2018 $4,000 Add: Deposit in transit $540 Subtract: Outstanding checks 2,288
BANK RECONCILIATION Customer's check (from Opie) returned NSF Books - subtract $100 Checks Barney wrote that haven t cleared the bank Bank - subtract $2,288 Check charged to Barney in error by the bank $200 Bank - add
BANK RECONCILIATION PER THE BANK Balance per Bank, 12/31/2018 $4,000 Add: Deposit in transit $540 Check charged us in error 200 740 Subtract: Outstanding checks 2,288
BANK RECONCILIATION PER THE BANK Balance per Bank, 12/31/2018 $4,000 Add: Deposit in transit $540 Check charged us in error 200 740 Subtotal $4,740 Subtract: Outstanding checks 2,288
BANK RECONCILIATION PER THE BANK Balance per Bank, 12/31/2018 $4,000 Add: Deposit in transit $540 Check charged us in error 200 740 Subtotal $4,740 Subtract: Outstanding checks 2,288 Adjusted Balance, 12/31/2018 $2,452
BANK RECONCILIATION A $275 check (for postage) was recorded in the Cash Payments Journal as $257. Original Entry: Postage Expense 257 Cash 257 Difference is $18 Correct Entry: Postage Expense 275 Cash 275 Books subtract $18
BANK RECONCILIATION PER THE BOOKS Balance per Company s Books 12/31/18 $1,500 Add: Note and interest collected by bank $1,030 Subtract: Bank svc. charges $ 10 NSF check 100 Error in recording check 18 128
Books add $50 BANK RECONCILIATION A $350 deposit (for cash sales) was recorded on the books for $300. Original Entry: Cash 300 Sales 300 Difference is $50 Correct Entry: Cash 350 Sales 350
BANK RECONCILIATION PER THE BOOKS Balance per Company s Books 12/31/18 $1,500 Add: Note and interest collected by bank $1,030 Error in rec. deposit 50 1,080 Subtract: Bank svc. charges $ 10 NSF check 100 Error in recording check 18 128
BANK RECONCILIATION PER THE BOOKS Balance per Company s Books 12/31/18 $1,500 Add: Note and interest collected by bank $1,030 Error in rec. deposit 50 1,080 Subtotal $2,580 Subtract: Bank svc. charges $ 10 NSF check 100 Error in recording check 18 128
BANK RECONCILIATION PER THE BOOKS Balance per Company s Books 12/31/18 $1,500 Add: Note and interest collected by bank $1,030 Error in rec. deposit 50 1,080 Subtotal $2,580 Subtract: Bank svc. charges $ 10 NSF check 100 Error in recording check 18 128 Adjusted Balance, 12/31/18 $2,452
IN CLASS EXERCISE 7-18 Bank reconciliation
ANDY GRIFFITH SHOW TRIVIA How were Deputy Barney Fife and Sheriff Andy Taylor related? Cousins What famous actor appeared in the episode, "Aunt Bea, the Juror? Jack Nicholson
BANK RECONCILIATION Must make journal entries so the Cash account balance in the General Ledger equals the new adjusted cash balance!
BANK RECONCILIATION Journal entries must be made for all adjustments to the BOOKS Why? Why not for adjustments to the BANK?
JOURNAL ENTRIES Adjustment ADDED to books? DEBIT cash (increase it) Adjustment SUBTRACTED from books? CREDIT cash (decrease it) Adjustment for ERROR on books? Jot down original entry
EXAMPLES OF TRANSACTIONS REQUIRING JOURNAL ENTRIES Example: interest earned on account Cash ( ) Interest Income ( ) Example: note receivable and interest collected by bank Cash ( ) Note Receivable ( ) Interest Income ( )
EXAMPLES OF TRANSACTIONS REQUIRING JOURNAL ENTRIES Example: NSF check Accounts Receivable ( ) Cash ( ) Example: Bank service charges Bank Charge Expense ( ) Cash ( )
BANK RECONCILIATION PER THE BOOKS Balance per Books 12/31/18 $1,500 Add: Note and interest collected by bank $1,030 Error in rec. deposit 50 1,080 Subtract: Bank svc. charges $ 10 NSF check 100 Error in recording check 18 128
JOURNAL ENTRIES - EXAMPLE Handout page 15 Cash ( ) (total) Note Receivable ( ) 1,000 Interest Income ( ) 30
BANK RECONCILIATION PER THE BOOKS Balance per Books 12/31/18 $1,500 Add: Note and interest collected by bank $1,030 Error in rec. deposit 50 1,080 Subtract: Bank svc. charges $ 10 NSF check 100 Error in recording check 18 128
JOURNAL ENTRIES - EXAMPLE Handout page 15 Cash ( ) (total) 1,080 Note Receivable ( ) 1,000 Interest Income ( ) 30 Sales ( ) 50
BANK RECONCILIATION PER THE BOOKS Balance per Books 12/31/18 $1,500 Add: Note and interest collected by bank $1,030 Error in rec. deposit 50 1,080 Subtract: Bank svc. charges $ 10 NSF check 100 Error in recording check 18 128
JOURNAL ENTRIES - EXAMPLE Bank Svc. Charge Exp.( ) 10 Cash ( ) (total)
BANK RECONCILIATION PER THE BOOKS Balance per Books 12/31/18 $1,500 Add: Note and interest collected by bank $1,030 Error in rec. deposit 50 1,080 Subtract: Bank svc. charges $ 10 NSF check 100 Error in recording check 18 128
JOURNAL ENTRIES - EXAMPLE Bank Svc. Charge Exp.( ) 10 Acc. Rec., Opie ( ) 100 Cash ( ) (total)
BANK RECONCILIATION PER THE BOOKS Balance per Books 12/31/18 $1,500 Add: Note and interest collected by bank $1,030 Error in rec. deposit 50 1,080 Subtract: Bank svc. charges $ 10 NSF check 100 Error in recording check 18 128
JOURNAL ENTRIES - EXAMPLE Bank Svc. Charge Exp.( ) 10 Acc. Rec., Opie ( ) 100 Postage Expense ( ) 18 Cash ( ) (total) 128
WHAT IS ENDING BALANCE IN CASH IN GENERAL LEDGER? 1,500 CASH 1,080 128 2,452 WHAT IS BARNEY S TRUE" CASH BALANCE? $2,452
HOMEWORK: EXERCISE 7-19 PROBLEM 7-3A PROBLEM 7-5A Bank reconciliation, journal entries
OMIT!!
DESCRIBE AND ILLUSTRATE THE REPORTING OF CASH AND CASH EQUIVALENTS IN THE FINANCIAL STATEMENTS
A CURRENT ASSET First current asset why? Usually one figure presented for cash (all accounts combined) What are Cash Equivalents? Cash and Cash Equivalents on Balance Sheet
COMPENSATING BALANCE Minimum cash balance we may be required to keep at bank as part of loan agreement or line of credit Disclose in notes to statements
ANDY GRIFFITH SHOW TRIVIA How many Emmys did Don Knotts win? 5 for Outstanding Performance by Actor in a Supporting Role Mayberry, North Carolina was based upon what city? Mt. Airy, North Carolina: Andy Griffith's birthplace
Chapter 7 SARBANES-OXLEY, INTERNAL CONTROL, CASH Learning Objectives 1. Sarbanes-Oxley 2. Internal Controls 3.Cash Internal Controls 4. Bank Accounts 5. Bank Reconciliation 6. Omit 7. Balance Sheet Cash Presentation