Cash and Internal Controls: Key Concepts and Regulations

Checks outstanding

Checks written by the company but not yet reflected as a decrease in the bank's cash balance.

Collusion

Two or more people acting in coordination to circumvent internal controls.

Deposits outstanding

Cash received by the company but not yet reflected as an increase in the bank's cash balance.

Fraud triangle

The three elements present for every fraud—motivation, rationalization, and opportunity.

Bank reconciliation

Matching the balance of cash in the bank account with the balance of cash in the company's own records.

Cash

Currency, coins, balances in savings and checking accounts, items acceptable for deposit in these accounts (such as checks received from customers), cash to be collected from debit and credit card sales, and cash equivalents.

Cash equivalents

Short-term investments that have a maturity date no longer than three months from the date of purchase.

Purchase cards

Company-issued debit cards or credit cards that allow authorized employees to make purchases on behalf of the company.

Sarbanes-Oxley Act

Known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly referred to as SOX; the act established a variety of guidelines related to auditor-client relations and internal control procedures.

Separation of duties

A set of procedures intended to separate employees duties for authorizing transactions, recording transactions, and controlling related assets.

Free cash flows

Simply measured as operating cash flows plus investing cash flows.

Internal controls

A company's plan to (1) safeguard the company's assets and (2) improve the accuracy and reliability of accounting information.

NSF check

A check received from a customer and deposited by a company that is later determined by the bank to have nonsufficient funds.

Occupational fraud

The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources.

Petty cash fund

Small amount of cash kept on hand to pay for minor purchases.

Fictitious revenues

Revenues recorded from a fake customer.

Improper asset valuation

Incorrect assessment of an asset's worth.

Mismatching revenues and expenses

Recording revenues and expenses inappropriately.

Sarbanes-Oxley Act (SOX)

Legislation that mandates increased regulations related to auditor-client relations, internal control, and corporate executive accountability.

Good internal control of cash disbursements

Making all cash disbursements using cash rather than debit or credit cards.

Detective controls

Controls that help identify errors or fraud after they have occurred.

Cash receipts internal control

Allowing customers to pay with a debit card is not considered good internal control.

Bank reconciliation adjustments

Adjustments include NSF checks from customers, service fees, errors by the company, and outstanding checks.

Employee fraud prevention

Less likely to occur when access to assets and accounting records are separated.

Cash disbursement limits

Setting maximum purchase limits on debit and credit cards.

Cash receipts recording

Recording cash receipts as soon as they are received.

Management asset verification

Management periodically determines whether the amount of physical assets agree with the accounting records.

Internal control policies awareness

Employees should be made aware of the company's internal control policies.

Formal guidelines for cash handling

Establishing formal guidelines to handle cash receipts and make purchases.

Safe document storage

Important documents should be kept in a safe place.

Electronic file backup

Electronic files should be backed up regularly.

Separation of managerial duties

Duties of middle-level managers should be clearly separated from those of top executives.

External auditor independence

External auditors should have no contact with managers while the audit is taking place.

Cash deposit requirement

Requiring the employee receiving cash to also deposit it into the company's bank account.