Accounting 8.2/8.3

Limitations of Internal Control

1. Costs should not exceed benefit.

2. Human element.

3. Size of the business.

The person with primary responsibility for reconciling the bank account and making all bank deposits is also the company’s accountant.

Which control is violated?

Segregation of Duties

• Recordkeeping should be separate from physical custody.

• Employee could embezzle cash and make journal entries to hide the theft.

Wellstone Company’s treasurer received an award for distinguished service because he had not taken a vacation in 30 years.

What control is violated?

Human Resource Controls

• Key employees must take vacations.

• Treasurer, who manages the company’s cash, might embezzle cash and use his position to conceal the theft.

In order to save money spent on order slips and to reduce time spent keeping track of order slips, a local bar/restaurant does not buy prenumbered order slips.

What control is violated?

Documentation Procedures

• If prenumbered documents are not used, then it is virtually impossible to account for the documents.

• An employee could write up a dinner sale, receive cash from the customer, and then throw away the order slip and keep the cash.

Over-the-counter- receipts are an important internal control principle that…

segregates record -keeping from physical custody.

Mail Reciepts procedure

• Mail receipts should be opened by two mail clerks, a list prepared, and each check endorsed “For Deposit Only.”

• Each mail clerk signs the list to establish responsibility for the data.

• Original copy of the list, along with the checks, is sent to the cashier’s department. (physical custody)

• Copy of the list is sent to the accounting department for recording (record keeping). Clerks also keep a copy.

Permitting only designated personnel to handle cash receipts is an application of the principle of:

establishment of responsibility

Generally, internal control over cash disbursements is more effective when

companies pay by check or electronic funds transfer (EFT) rather than by cash (only exception is petty cash)

The use of prenumbered checks in disbursing cash is an application of the principle of

documentation procedures

Voucher System Controls

A network of approvals by authorized individuals, acting independently, to ensure all disbursements by check are proper.

A voucher

an authorization form prepared for each expenditure in a voucher system

Petty Cash Fund

Used to pay small amounts.

3 Steps for Petty Cash

1. establishing the fund (Dr. Petty Cash, Cr. Cash)

2. making payments from the fund (Dr. all Expenses, Cr Petty Cash)

• cash short is debited, cash over is credited

3. replenishing the fund. (Dr. Petty Cash, Cr. Cash)

The use of a bank contributes significantly to good internal control over cash because it…

1. Minimizes the amount of currency on hand.

2. Creates a double record of bank transactions.

3. Bank reconciliation.

Debit Memorandum

• Bank service charge.

• NSF (not sufficient funds).

Credit Memorandum

• Collect notes receivable.

• Interest earned.

The control features of a bank account do not include

having bank auditors verify the correctness of the bank balance per books

Reconciling Items

1. Deposits in transit. 2. Outstanding checks. 3. Bank memoranda. 4. Errors. (1-3 are time lags)

Reconciliation per bank statement

Deposits in transit (add)

Outstanding checks (subtract)

Bank Errors (add/subtract)

Reconciliation per books

Notes collected by bank (add)

NSF (bounced) checks (subtract)

Check printing/service charges (subtract)

Company Errors (add/subtract)

4 Reconciliation Steps

1. Add deposits in transit (deposits listed at the end of the month per books, but not per bank)

2. Subtract outstanding checks (1. outstanding checks listed in previous reconciliation, but not paid per bank and 2. current cash payments included per books but not under checks per bank)

3. Errors - company: if bank records lower, add, if bank records higher, subtract bank: if bank deducts from your account, add, if bank adds to your account, subtract

4. Bank Memoranda (subtract NSF check, subtract charges, subtract payment of notes (add interest) add collection of notes (add interest and subtract fees))

Bank Reconciliation Entries - Notes Receivable

Dr. Cash, Dr. Miscellaneous Expense (fee), Cr. Notes Receivable, Cr. Interest Revenue (interest)

Bank Reconciliation Entries - Book Error

Dr. Cash, Cr. Accounts Payable (bank records lower amount)

Dr. Accounts Payable, Cr. Cash (bank records higher amount)

Bank Reconciliation Entries - NSF Check

Dr. Accounts Receivable, Cr. Cash

Bank Reconciliation Entries - Bank Service Charges

Dr. Miscellaneous Expense, Cr. Cash

The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is

bank service charges

Cash equivalents

short-term, highly liquid investments that are both: 1. Readily convertible to known amounts of cash, and

2. So near their maturity that their market value is relatively insensitive to changes in interest rates.

(first on balance sheet/assets)

Restricted Cash

Cash that is not available for general use but rather is restricted for a special purpose

(last on balance sheet/assets)

Which of the following statements correctly describes the reporting of cash?

Cash is listed first in the current assets section