Chapter 7

CASH AND INTERNAL

CONTROLS

PowerPoint Authors:
Winston Kwok, Ph.D., MBA, CA
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

Copyright © 2016 by McGraw-Hill Education (Asia). All rights reserved.

 7-2

C1

INTERNAL CONTROL SYSTEM

Policies and procedures managers use to:

 Protect assets.
 Ensure reliable accounting.
 Promote efficient operations.
 Urge adherence to company policies.
 7-3

C1

PRINCIPLES OF INTERNAL CONTROL

Internal control principles common to all companies:

1. Establish responsibilities.
2. Maintain adequate records.
3. Insure assets and bond key employees.
4. Separate recordkeeping from custody of assets.
5. Divide responsibility for related transactions.
6. Apply technological controls.
7. Perform regular and independent reviews.
 7-4

C1 TECHNOLOGY AND INTERNAL

CONTROL

Reduced More
Processing Extensive Testing
Errors of Records

Limited Crucial
Evidence of Separation of
Processing Duties

Increased
E-Commerce
 7-5

C1

LIMITATIONS OF INTERNAL CONTROL

Human Error Human Fraud

Negligence Intent to
Fatigue defeat internal
Misjudgment controls for
Confusion personal gain

Human fraud triple-threat:

Opportunity, Pressure, and Rationalization.
 7-6

C1

LIMITATIONS OF INTERNAL CONTROL

The costs of internal controls

must not exceed their benefits.

Benefits
Costs
 7-7

C2

CONTROL OF CASH
An effective system of internal control that
protects cash and cash equivalents should meet
three basic guidelines:

Handling cash Cash receipts

is separated from are promptly
recordkeeping of deposited in a
cash. bank.
Cash
disbursements
are made by
check.
 7-8

C2 CASH, CASH EQUIVALENTS,

AND LIQUIDITY
Cash and similar assets are called liquid assets because
they can be readily used to settle such obligations.
Cash
Currency, coins and amounts on deposit in bank accounts,
checking accounts, and some savings accounts. Also
includes items such as customer checks, cashier checks,
certified checks, and money orders.

Cash Equivalents
Short-term, highly liquid investments that are:
1. Readily convertible to known amounts of cash.
2. Subject to an insignificant risk of changes in value.
 7-9

C2

CASH MANAGEMENT
The goals of cash management are twofold:
1. Plan cash receipts to meet cash payments when due.
2. Keep a minimum level of cash necessary to operate.

Effective cash management involves applying

the following cash management principles:
 Encourage collection of receivables.
 Delay payment of liabilities.
 Keep only necessary levels of assets.
 Plan expenditures.
 Invest excess cash.
 7 - 10

P1 OVER-THE-COUNTER CASH
RECEIPTS
This graphic illustrates that none of the people
involved can make a mistake or divert cash
without the difference being revealed.
 7 - 11

P1
CASH OVER AND SHORT
Sometimes errors in making change are discovered from
differences between the cash in the cash register and the
record of the amount of cash receipts.

If a cash register’s record shows $550 but the count of cash in

the register is $555, we would prepare the following journal
entry:
 7 - 12

P1

CASH RECEIPTS BY MAIL

The
Preferably, two recordkeeper
The cashier
people are records the
deposits the
assigned the amounts
money in a
task of opening received in the
bank.
the mail. accounting
records.

Mailroom Cashier Recordkeeper

 7 - 13

P1 CONTROL OF CASH
DISBURSEMENTS
Control of cash disbursements is especially
important as most large thefts occur from
payment of fictitious invoices.

Keys to Controlling Cash Disbursements

 Require all expenditures to be made by check.
 Limit access to checks except for those who
have the authority to sign checks.
 7 - 14

P1

VOUCHER SYSTEM OF CONTROL

A voucher
voucher system
system establishes procedures
for:
1.
1. Verifying,
Verifying, approving,
approving, andand recording
recording
obligations
obligations for
for eventual
eventual cash
cash disbursements.
disbursements.
2.
2. Issuing
Issuing checks
checks forfor payment
payment of
of verified,
verified,
approved,
approved, and
and recorded
recorded obligations.
obligations.
 7 - 15

P1

VOUCHER SYSTEM OF CONTROL

 7 - 16

P2

PETTY CASH SYSTEM OF CONTROL

Small
Small payments
payments required
required in
in most
most companies
companies
for
for items
items such
such as
as postage,
postage, courier
courier fees,
fees,
repairs,
repairs, and
and supplies.
supplies.
 7 - 17

P2

OPERATING A PETTY CASH FUND

Petty Cash

Company Petty
Cashier Cashier

Accountant
 7 - 18

P2

OPERATING A PETTY CASH FUND

Petty
Cashier
Petty Cash
 7 - 19

P2

OPERATING A PETTY CASH FUND

A petty cash fund is

used only for
business expenses. Petty
Cashier

Transportation-in Services Supplies Delivery

 7 - 20

P2

OPERATING A PETTY CASH FUND

Petty
Cashier

Petty cash receipts

with either no signature
or a forged signature
usually indicate misuse Transportation-in Services Supplies Delivery
of petty cash.
 7 - 21

P2

OPERATING A PETTY CASH FUND

$71.30

To reimburse
Company Petty
petty cash fund
Cashier Cashier

Accountant
 7 - 22
C2

BASIC BANK SERVICES

Bank
Bank Accounts
Accounts Signature
Signature Cards
Cards Deposit
Deposit Tickets
Tickets

Electronic
Electronic Bank
Bank
Checks
Checks Funds
Funds Transfer
Transfer Statements
Statements
 7 - 23

BANK STATEMENT
C2

Usually once
a month, the
bank sends
each
depositor a
bank
statement
showing the
activity in the
account.
 7 - 24

P3

BANK RECONCILIATION
A bank reconciliation is prepared periodically to explain
the difference between cash reported on the bank
statement and the cash balance on company’s books.

Bank Company

=/=

Deposit in
Transit

=
 7 - 25

P3
BANK RECONCILIATION
The balance of a checking account reported on
the bank statement rarely equals the balance in
the depositor’s accounting records.

Cash Balance per Bank Cash Balance per Book

+ Deposits in Transit + Collections & Interest

Time
difference Not able to
- Outstanding Checks - Uncollectible itemscash e.g. fr

+/- Errors +/- Errors

Adjusted Cash Balance Adjusted Cash Balance

=
Adjusting entries are recorded for the reconciling items on
the book side of the reconciliation.
 BANK RECONCILIATION
7 - 26

P3 EXAMPLE

Let’s
Let’s prepare
prepare aa October
October 31,
31, 2015
2015 bank
bank
statement
statement for
for Videobuster.
Videobuster.

The
 The October
October 31
31 bank
bank statement
statement indicated
indicated
aa balance
balance of
of $2,050.
$2,050.
The
 The Cash
Cash general
general ledger
ledger account
account on
on that
that
date
date shows
shows aa balance
balance of
of $1,404.58.
$1,404.58.

Additional
Additional information
information necessary
necessary for
for the
the
reconciliation
reconciliation is
is shown
shown on
on the
the next
next slide.
slide.

6-26
7 - 27
 7 - 28

BANK RECONCILIATION
P3 EXAMPLE - VIDEOBUSTER
1. The bank statement balance of the cash account is $2,050.
2. $145 deposit placed in the bank’s night depository on
October 31 is not recorded on its bank statement.
3. A comparison of cancelled checks with its books shows
two checks outstanding : No.124 for $150 and No.126 for
$200.
4. The company’s book balance of the cash account is
$1404.58.
5. The bank statement includes a credit memorandum of a
note receivable. The note’s proceeds of $500 (minus a $15
collection fee) are credited to the company’s account.
6. The following items have not been recorded (a) $23 charge
for check printing and (b) an NSF check for $20 plus a
related $10 processing fee.

6-28
 7 - 29

P3 ILLUSTRATION OF A BANK
RECONCILIATION
We follow nine steps in preparing the
bank reconciliation.
Cash Balance per Bank

+ Deposits in Transit

- Outstanding Checks

+/- Errors

Adjusted Cash Balance

 7 - 30

P3 ILLUSTRATION OF A BANK
RECONCILIATION
We follow nine steps in preparing the
bank reconciliation.
Cash Balance per Book

+ Collections & Interest

- Uncollectible items

+/- Errors

Adjusted Cash Balance

 7 - 31

P3 ILLUSTRATION OF A BANK
RECONCILIATION
We follow nine steps in preparing the
bank reconciliation.

Adjusting entries are recorded for the reconciling

items on the book side of the reconciliation.
 7 - 32

P3 ILLUSTRATION OF A BANK
RECONCILIATION
Only the items reconciling the book balance
require adjustment.
 7 - 33

END OF CHAPTER 7