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    Chapter6 Cash and Internal Control

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    Chapter6 Cash and Internal Control

    Uploaded by

    alice barnes
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    Chapter6-Cash-and-Internal-Control

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    7 views28 pages

    Chapter6 Cash and Internal Control

    Uploaded by

    alice barnes

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    © All Rights Reserved
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    PRINCIPLES of ACCOUNTING

    CHAPTER 6
    Internal Control and Cash
    Learning Outcomes

    ● Define internal control, its components


    and principles with related procedures,
    ● Describe the impact of fraud in financial
    statements
    ● Apply internal control over cash receipts
    and payments
    ● Describe the bank account as a control
    device,
    ● Understand the way of reporting cash
    Internal Control

    ● Management has the responsibility to constitute and maintain an


    effective controls in a business entity.

    ● These controls should be designed in a systematic manner.

    ● This control structure should provide reasonable assurance.


    Definition of Internal Control

    ● The objective of internal control is to provide reasonable assurance that (1)


    assets are safeguarded and used for business purposes, (2) business
    information is accurate, and (3) employees comply with laws and
    regulations.
    ● COSO established a control framework and this model is the most important
    and popular framework around the world.
    ● COSO definition of internal control;

    “Internal control is a process, affected by an entity’s board of directors,


    management, and other personnel, designed to provide reasonable assurance
    regarding the achievement of objectives related to operations, reporting and
    compliance.
    COSO Framework
    COSO Framework

    The COSO framework is represented as a cube:


    COSO Framework

    Internal control has five components;

    ● Control Environment
    ● Risk Assessment
    ● Control Activities
    ● Information and Communication
    ● Monitoring Activities
    Fraud

    ● Fraud is an intentional misrepresentation of facts which is made made for


    purpose of persuading another party to act in a way that causes injury or
    damage to that party.
    ● An error is an unintentional misrepresentation of some items.

    ● The difference between the terms error and fraud is based on intention.

    ● The efficiency and effectiveness of control structure should be monitored


    continuously in order to prevent fraud.
    Types of Fraud

    Fraud can be classified into two common types according to their impacts on
    financial statements:

    ● Misappropriation of assets: Frauds which are committed by employees to


    steal money or other assets.
    ● Fraudulent financial reporting:Frauds which are committed by managers
    to make false and misleading entries in the books.
    Internal Control Over Cash Receipts And Payments

    Control procedures are very critical for cash


    because of some characteristics of cash.
    Cash is the most liquid asset of the business
    which is reported as a current asset on the
    balance sheet.

    Internal control is discussed from two sides:

    1. Internal control over cash receipt


    2. Internal control over cash payments

    A cash budget is an effective internal control device for cash management


    Internal Control Over Cash Receipts

    ● There are some ways to improve the effectiveness of controls over the
    counter;
    ○ using an improved software,
    ○ giving responsibilities to different competent employees over time,
    ○ using more technological devices or may be some artificial intelligence,
    perform timely reconciliations in some cases,
    ○ working with banks which provide some special cash management
    services,
    ○ limiting some signature authorities or access, etc.

    However, first, have to consider the cost and benefits of controls for cash and try
    to decide on an optimum level.
    Internal Control Over Cash Payments

    There must be a separate authorized employee to make payments and there


    must be well designed approval process

    To achieve effective controls on cash payment, it should be verified, approved


    and recorded.In this process, companies usually use a “voucher system.”

    Drawing a check is the most frequent way of making payments; and it is an


    effective control procedure for payments. Because, it provides a reliable
    evidence of payment in the first place.

    According to the separation of duties, there should be separate authorized


    employees for preparing purchase orders, receiving inventory/other assets and
    approving and paying for inventory/other assets.
    Internal Control Over Cash Payments

    Instead of writing checks for small payments such as stationery, meals, etc.,
    businesses can prefer using a petty cash fund .

    Assume that Company (A) is creating a petty cash fund for TL 1,000 on April 14,
    of 2018. While designating a specific amount of cash to be kept in the petty cash
    account, one of the asset accounts decreases and the other one increases. e
    journal entry, then, is as follows:
    Internal Control Over Cash Payments

    Assume that based on Company (A)’s financial transactions by using a petty


    cash fund, on April 30th of 2018 petty cash fund holds 510 TL, a petty cash
    voucher/ticket for 250 TL for advertising expenses and another petty cash
    voucher/ticket for 230 TL for utilities expenses.
    Internal Control Over Cash Payments

    In the journal entry to replenish the petty cash fund, the 490 TL (the used up
    amount) should be added to it.

    There is a new account in the journal entry named Cash Short & Over.
    The Bank Account As A Control Device

    ● Bank account can be defined as a very important control device for


    businesses because it requires approval from both the business and the
    bank.
    ● A company’s cash account corresponds to the bank’s liability (deposit)
    account for that company.
    ● In this process, the differences between the cash on the businesses’ books
    and the cash on the banks’ record can be seen clearly and required journal
    entries can be prepared.
    ● Online banking can provide real time assurance instead of periodic
    assurance through controls.
    Bank Statement

    A bank statement is a document which is prepared by a bank to show the


    transactions that occurred in the account of a business within a month.

    It can be defined as a statement that provides a list of cash transactions.


    Bank Reconciliation

    ● A bank reconciliation is a statement that explains any differences between


    the balance shown on the bank statement and the balance shown on the
    business’s accounting records.
    ● A bank reconciliation has two sides: One of them is for the bank and other
    one is for the business.
    ● Required corrections can be seen for both sides.
    ● Some differences require adjusting entries for the business’s book side.
    ● After taking a list of differences from the bank reconciliation, accounts can
    be updated.
    Bank Reconciliation
    Bank Reconciliation

    Assume that Company (A) realized some differences between the balance in the
    books and the balance in the bank statement.

    According to the investigations, the reasons for differences were determined as


    follows:

    1. The interest revenue earned in April is 450TL.


    2. A check for 2,000TL is marked as NSF (Not Sufficient Fund) in April
    3. A telephone bill of 125TL was paid by EFT in April.
    Bank Reconciliation

    The journal entries should be as follows:


    Reporting Cash

    Reporting Cash

    ● A Balance Sheet is started with “Current Assets” and the first current asset
    item is “Cash” which is the most liquid asset of a business.
    ● Cash equivalents can be defined as highly liquid investments that can be
    converted into cash in a short term.
    ● On the balance sheet, the balance of the cash and cash equivalents can be
    seen, but the details of them should be explained in the footnotes of the
    financial statements.
    Question

    For the achievement of which objectives should internal control provide


    reasonable assurance?

    A. Operational, reporting, compliance

    B. Operational, strategic, compliance

    C. Strategic, control, compliance

    D. Operational, risk assessment, control

    E. Reporting, compliance, risk assessment


    Answer

    For the achievement of which objectives should internal control provide


    reasonable assurance?

    A. Operational, reporting, compliance

    B. Operational, strategic, compliance

    C. Strategic, control, compliance

    D. Operational, risk assessment, control

    E. Reporting, compliance, risk assessment


    Question

    What is the name of the highly liquid investments that can be converted into
    cash in a short term?

    A. Cash

    B. Petty cash fund

    C. Cash equivalents

    D. Cash short & over

    E. Checks
    Answer

    What is the name of the highly liquid investments that can be converted into
    cash in a short term?

    A. Cash

    B. Petty cash fund

    C. Cash equivalents

    D. Cash short & over

    E. Checks
    Question

    Which component of internal control establishes some actions based on policies


    and procedures?

    A. Monitoring activities

    B. Control environment

    C. Risk assessment

    D. Information and communication

    E. Control activities
    Answer

    Which component of internal control establishes some actions based on policies


    and procedures?

    A. Monitoring activities

    B. Control environment

    C. Risk assessment

    D. Information and communication

    E. Control activities

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