Acct 203 Chapter 6

Front 1

Internal Controls System Purpose

Back 1

consists of the policies and procedures managers use to:
-- Protect assets.
-- Ensure reliable accounting.
-- Promote efficient operations.
-- Urge/ mandate adherence to company policies.

Front 2

Principals of Internal Controls

Back 2

fundamental internal control principles that apply to all companies.
1. Establish clear responsibilities.
2. Maintain adequate records (FCC rule).
3. Insure assets and bond key employees (prevents internal theft).
4. Separate recordkeeping from custody of assets.
5. Divide responsibility for related transactions.
6. Apply technological controls.
7. Perform regular and independent audits and review.

Front 3

Establish Responsibilities

Back 3

Responsibility for a task is clearly established and assigned to one person.

Front 4

Maintain Adequate Records

Back 4

Protects assets and ensures employees used prescribed procedures
Allows managers to monitor company activities making it difficult for items to be lost or stolen without detection.

Front 5

Insure Assets and Bond Key Employees

Back 5

Insuring assets against casualty and theft protects the assets

Bonding employees protects you from and discourages internal theft

Front 6

Separate Record-keeping from Custody of Assets

Back 6

A person who controls or has access to an asset must not keep that asset's accounting record.

Front 7

Divide Responsibility for Related Transactions

Back 7

This ensures that the work of one individual acts as a check on the other.
Example: Placing purchase orders, receiving merchandise, and paying vendor

Front 8

Apply Technological Controls

Back 8

Examples: Cash register, check protectors, time clocks, personal identification scanners

Front 9

Perform Regular Independent Reviews

Back 9

Ensures that procedures are being followed and encourages evaluation of the efficiency/effectiveness of the internal controls

Front 10

Technology and Internal Controls:

Back 10

-- Reduces processing errors
-- More extensive testing of records
(allows managers/auditors to easily/extensively check transactions
-- Crucial separation of duties
(provides opportunity to separate the responsibilities of related actions)

Front 11

Limitations of Internal Control:

Back 11

1. Human error and fraud (most serious)
2. Cost-benefit principle

Front 12

Human fraud is driven by:

Back 12

1. Opportunity: internal control deficiencies
2.Pressure: financial, family, society, or other stresses to succeed
3. Rationalization: employees justifying fraudulent behavior

Front 13

Cost-Benefit Principle

Back 13

The cost of internal controls must not exceed their benefits.

Front 14

Liquidity

Back 14

A company’s ability to pay for its near-term obligations.

Front 15

Liquid Assets

Back 15

(cash and similar assets) can be readily used to settle such obligations.

Front 16

Cash

Back 16

includes currency, coins, amounts on deposit in bank accounts, checking accounts (demand deposits), many savings accounts (time deposits), customer checks, cashier’s checks, certified checks, and money orders.

Front 17

Cash Equivalents

Back 17

are short-term, highly liquid investment assets that are readily convertible to a known cash amount and sufficiently close to their due date (90 days or less!!!)

Front 18

Cash Equivalents Examples

Back 18

Short-term investments in US Treasury bills

Money market funds

Front 19

NOT Cash Equivalents

Back 19

Common Stock

Accounts Receivable

Front 20

Cash Management Goal:

Back 20

1. Plan cash receipts to meet cash payments when due.

2. Keep a minimum level of cash necessary to operate.

Front 21

Cash Management Principles:

Back 21

1. Encourage collection of receivables

2. Delay payment of liabilities

3. Keep only necessary levels of assets

4. Plan expenditures

5. Invest excess cash

Front 22

Encourage collection of receivables:

Back 22

The sooner customers or others pay the company the sooner the money can be used.

Front 23

Delay payment of liabilities

Back 23

Delaying payment to others allows the company to use the money longer.

Front 24

Keep only necessary levels of assets

Back 24

Money should be invested in productive assets not tied up in idle assets.

Front 25

Plan expenditures

Back 25

Money should be spent only when it is available

Front 26

Invest excess cash

Back 26

Excess cash earns no returns and should be invested

Front 27

Cash over and short

Back 27

Income Statement Account

error between the cash in a cash register and the record of the amount of cash receipts. The difference is reported in the cash over and short account

Front 28

Cash Overages

Back 28

Debit Cash

Credit Sales
Credit Cash Over and Short

Front 29

Cash Shortage

Back 29

Debit Cash
Debit Cash Over and Short

Credit Sales

Front 30

Cash Over and Short Debit Balance

Back 30

Reflects an expense which gets reported on the income statement as part of general and administrative expenses

Often combined with other small expenses and record as Miscellaneous Expenses

Front 31

Control of Cash Receipts

Back 31

Cash receipts are deposited to the bank DAILY

Person handling cash will NEVER get access to the ledger

Voucher System

Front 32

Voucher System of Control

Back 32

Verifying, approving, and recording obligations for eventual case disbursement

Issuing checks for payment of verified, approved, and recorded obligations

Front 33

Bank Statement

Back 33

1. Beginning-of-period balance

2. Checks and other debits (decreases balance)

3. Deposits and other credits (increase balance)

4. End-of-period balance

Front 34

Bank Reconciliation

Back 34

Report explaining any differences between the checking account balance according to the depositor's record and the balance reported on the bank statement

Front 35

Outstanding Checks

Back 35

Checks written (or drawn) by the depositor, deducted on the depositor's records, and sent to the payees but not yet received by the bank

Front 36

Deposits in transit

Back 36

Deposits made and recorded by the depositor but not yet recorded on the bank statement

Front 37

Bank Reconciliation Equation

Back 37

Balance per bank statement
+Deposits in transit
--Outstanding Checks
= Balance per Book

Front 38

Bank Reconciliation items that require adjustment

Back 38

Collection of note by bank

NSF check

Interest earned

Bank charges

Front 39

Petty Cash

Back 39

Reported on the Balance Sheet

Established to pay for small payments like postage

Used to avoid time and cost of writing checks for small amounts