MGMT 200 Chapter 4: Cash and Internal Controls

Errors

accidental errors in recording transactions or applying accounting rules

Fraud

a person intentionally deceives another person for personal gain or to damage that person

Occupational fraud

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

Fraud triangle

opportunity, motivation, rationalization 

Internal controls represent plans to

safeguard the company’s assets and improve the accuracy and reliability of accounting information

Sarbanes-Oxley Act of 2002

applies to all companies that are required to file financial statements with the SEC, established guidelines related to internal control procedures and auditor-client relations

Components of internal control

monitoring, control activities, risk assessment, control environment

Preventative controls

separation of duties, physical controls, proper authorization, employee management, e-commerce controls

Separation of duties

a set of procedure intended to separate employees’ duties for authorizing transactions, recording transactions, and controlling the related assets

Physical controls

a set of procedures that ensure assets and accounting records are kept safe

Proper authorization

a set of procedures designed the prevent improper use of the company’s resources

Employee management

providing employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties

E-commerce controls

a set of procedures specifically designed to ensure only authroized personnel are able to conduct e-commerce transactions

Detective controls

reconciliations, performance reviews, audits

Reconciliations

management should periodically determine whether the amount of physical assets of the company (cash, supplies, inventory, and other property) agree with the accounting records

Performance reviews

the actual performance of individuals or processes should be checked against their expected performance

Audits

hire an independent auditor to assess the internal control procedures to detect an deficiencies or fraudulent behavior of employees

Top executives

everyone in a company has an impact on the operation and effectiveness of internal controls

Limitations of internal controls

easily susceptible to collusion

Cash includes

coins and currency, checks received, balances in savings and checking accounts, credit and debit card sales, and cash equivalents 

Cash equivalents

investments that mature within three months from the date of purchase (such as money market funds, treasury bills, and certificates of deposit)

Collections of payments from customers

cash and checks, credit cards and debit cards, mobile payments, electronic funds transfers, prepaid cards, cryptocurrencies 

Controls over receipt of cash and checks

1. Open mail each day, and make a list of cash and checks received, including the amount and payer’s name

2. Designate an employee to deposit cash and checks into the company’s bank account each day, different from the person who receives cash and checks

3. Have another employee record cash receipts in the accounting records as soon as possible. Verify cash receipts by comparing the bank deposit slip with the accounting records

4. Accept credit cards or debit cards, to limit the amount of cash employees handle

Acceptance of credit cards

the acceptance of credit cards provides an additional control by reducing employees’ need to directly handle cash, the credit card company deposits cash in the company’s bank for the amount of the sale less service fees

Controls over cash disbursements

1. Make all disbursements, other than very small ones, by check, debit card, or credit card. This provides a permanent record of all disbursements

2. Authorize all expenditures before purchase and verify the accuracy of the purchase itself. The employee who authorizes payment should not also be the employee who prepares the check

3. Make sure checks are serially numbered and signed only by authorized employees. Require two signatures for larger checks

4. Periodically compare amounts shown in the debit card and credit card statements with purchase receipts. The employee verifying the accuracy of the debit card and credit card statements should not also be the employee responsible for actual purchases

5. Set maximum purchase limits on debit cards and credit cards. Give approval to purchase above these amounts only to upper-level employees

6. Employees responsible for making cash disbursements should not also be in charge of cash receipts

Bank reconciliation

matches the balance of cash in the bank with the balance of cash in the company’s own records

Timing differences

in cash occur when the company records transactions before or after the bank records the same transactions

Steps in reconciling the bank account

reconcile the bank’s cash balance, reconcile the company’s cash balance, update the company’s cash account by recording items identified in step 2

Step 1: reconcile the bank’s cash balance

deposits outstanding (increase cash balance), checks outstanding (decrease cash balance), bank errors

Step 2: reconcile the company’s cash balance

items that increase the company’s cash balance include bank collections on company’s behalf and interest earned on average daily basis; items that decrease company’s cash balance include EFTs, NSF checks, debit card purchases, bank service fees, company errors

Step 3: update the company’s cash account

debit cash for items that add to the balance and credit cash for items that subtract from the balance

Petty cash

a small amount of cash kept on hand to pay for minor purchases

Accounting for the petty cash fund involves

establishing the fund, recognizing expenditures from the fund, replinishing the fund

Balance sheet

balance of cash, snapshot at end of period, current or noncurrent asset

Statement of cash flows

inflows/outflows, covers a period of time, and operating and investing and financing

Operating activites

cash transactions involving revenues and expenses

Operating activities examples

cash received from customers, cash paid for rent, utilities, supplies, and salaries

Investing activities

cash investments in long-term assets and investment securities

Investing activities examples

purchase or sale of land, equipment, and buildings for cash

Financing activities

transactions designed to finance the business through borrowing and owner investment

Financing activities example

issue common stock or pay dividends; borrow or repay debt