The document discusses internal controls over cash, including defining fraud and internal controls, principles of internal controls, and applications of internal controls to cash receipts and disbursements. It describes operating a petty cash fund and control features of a bank account, and explains reporting cash.

5. Fraud and Internal Control Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. Fraud SO 1 Define fraud and internal control. Why does fraud occur? Illustration 8-1

11. SO 2 Identify the principles of internal control. ESTABLISHMENT OF RESPONSIBILITY Control is most effective when only one person is responsible for a given task. SEGREGATON OF DUTIES Related duties, including physical custody and record keeping, should be assigned to different individuals. DOCUMENTATION PROCEDURES Companies should use prenumbered documents for all documents should be accounted for. Fraud and Internal Control Principles of Internal Control Activities

12. SO 2 Identify the principles of internal control. PHYSICAL CONTROLS Illustration 8-2 Fraud and Internal Control Principles of Internal Control Activities

17. Cash Receipts Controls SO 3 Explain the applications of internal control principles to cash receipts. Independent Internal Verification Supervisors count cash receipts daily; treasurer compares total receipts to bank deposits daily Establishment of Responsibility Only designated personnel are authorized to handle cash receipts (cashiers) Segregation of Duties Different individuals receive cash, record cash receipts, and hold the cash Documentation Procedures Use remittance advice (mail receipts), cash register tapes, and deposit slips Physical, Mechanical, and Electronic Controls Store cash in safes and bank vaults; limit access to storage areas; use cash registers Human Resource Controls Bond personnel who handle cash; require employees to take vacations; deposit all cash in bank daily Illustration 8-4 Cash Controls

18. Q8-6 . At the corner grocery store, all sales clerks make change out of one cash register drawer. Is this a violation of internal control? Why? See notes page for discussion Discussion Question SO 3 Explain the applications of internal control principles to cash receipts. Cash Controls

19. Cash Controls Q8-11 . The management of Sewell Company asks you, as the company accountant, to explain (a) the concept of reasonable assurance in internal control and (b) the importance of the human factor in internal control. See notes page for discussion Discussion Question SO 3 Explain the applications of internal control principles to cash receipts.

21. Over-the-Counter Receipts SO 3 Explain the applications of internal control principles to cash receipts. Illustration 8-4

23. Cash Controls Permitting only designated personnel to handle cash receipts is an application of the principle of: a. segregation of duties. b. establishment of responsibility. c. independent check. d. Human resource controls. Review Question SO 3 Explain the applications of internal control principles to cash receipts.

25. Cash Controls Independent Internal Verification Compare checks to invoices; reconcile bank statement monthly Establishment of Responsibility Only designated personnel are authorized to sign checks (treasurer) and approve vendors Segregation of Duties Different individuals approve and make payments; check signers do not record disbursements Documentation Procedures Use prenumbered checks; checks must have an approved invoice; require employees to use corporate credit cards for reimbursable expenses Physical Controls Store blank checks in safes, with limited access; print check amounts by machine in indelible ink Illustration 8-6 Cash Disbursements Controls Human Resource Controls Bond personnel who handle cash; require employees to take vacations; conduct background checks

26. Cash Controls Q8-17 Joe Griswold Company’s internal controls over cash disbursements provide for the treasurer to sign checks imprinted by a checkwriting machine in indelible ink after comparing the check with the approved invoice. Identify the internal control principles that are present in these controls. See notes page for discussion Discussion Question SO 4 Explain the applications of internal control principles to cash disbursements.

27. Cash Controls The use of prenumbered checks in disbursing cash is an application of the principle of: a. establishment of responsibility. b. segregation of duties. c. physical, mechanical, and electronic controls. d. documentation procedures. Review Question SO 4 Explain the applications of internal control principles to cash disbursements.

30. Cash Controls Illustration: If Laird Company decides to establish a $100 fund on March 1, the journal entry is: SO 5 Describe the operation of a petty cash fund. Petty cash 100 Mar. 1 Cash 100

31. Cash Controls Illustration: Assume that on March 15 Laird’s petty cash custodian requests a check for $87. The fund contains $13 cash and petty cash receipts for postage $44, freight-out $38, and miscellaneous expenses $5. The general journal entry to record the check is: SO 5 Describe the operation of a petty cash fund. Postage expense 44 Mar. 15 Cash 87 Freight-out 38 Miscellaneous expense 5

32. Cash Controls Illustration: Occasionally, the company may need to recognize a cash shortage or overage. Assume that Laird’s petty cash custodian has only $12 in cash in the fund plus the receipts as listed. The request for reimbursement would, therefore, be for $88, and Laird would make the following entry: SO 5 Describe the operation of a petty cash fund. Postage expense 44 Mar. 15 Cash 88 Freight-out 38 Miscellaneous expense 5 Cash over and short 1

34. Making Bank Deposits Authorized employee should make deposit. SO 6 Indicate the control features of a bank account. Bank Code Numbers Front Side Reverse Side Illustration 8-8 Control Features: Use of a Bank

35. Writing Checks Written order signed by depositor directing bank to pay a specified sum of money to a designated recipient. SO 6 Indicate the control features of a bank account. Maker Payee Illustration 8-9 Payer Control Features: Use of a Bank

39. Reconciliation Procedures SO 7 Prepare a bank reconciliation. + Deposit in Transit - Outstanding Checks +- Bank Errors + Notes collected by bank - NSF (bounced) checks - Check printing or other service charges +- Company Errors CORRECT BALANCE CORRECT BALANCE Illustration 8-11 Control Features: Use of a Bank

40. Illustration: The bank statement for Laird Company (Illustration 8-10), shows a balance per bank of $15,907.45 on April 30, 2010. On this date the balance of cash per books is $11,589.45. Using the four reconciliation steps, Laird determines the following reconciling items. Control Features: Use of a Bank

41. Illustration: a) Prepare a bank reconciliation at April 30. SO 7 Prepare a bank reconciliation. Cash balance per bank statement $15,907.45 Add: Deposit in transit 2,201.40 Less: Outstanding checks (5,904.00) Adjusted cash balance per bank $12,204.85 Cash balance per books $11,589.45 Collection of notes + interest - fee 1,035.00 Add: Error in recording check no. 443 36.00 Less: NSF check (425.60) Bank service charge (30.00) Adjusted cash balance per books $12,204.85 Control Features: Use of a Bank Illustration 8-12

42. The company records each reconciling item used to determine the adjusted cash balance per books . Collection of Note Receivable: Assuming interest of $50 has not been accrued and collection fee is charged to Miscellaneous Expense, the entry is: SO 5 Describe the operation of a petty cash fund. Cash 1,035.00 Apr. 30 Miscellaneous expense 15.00 Notes receivable 1,000.00 Interest revenue 50.00 Control Features: Use of a Bank

43. Book Error: The cash disbursements journal shows that check no. 443 was a payment on account to Andrea Company, a supplier. The correcting entry is: SO 5 Describe the operation of a petty cash fund. Cash 36.00 Apr. 30 Accounts payable 36.00 Control Features: Use of a Bank

44. NSF Check: As indicated earlier, an NSF check becomes an account receivable to the depositor. The entry is: SO 5 Describe the operation of a petty cash fund. Accounts receivable 425.60 Apr. 30 Cash 425.60 Bank Service Charges: Depositors debit check printing charges (DM) and other bank service charges (SC) to Miscellaneous Expense. The entry is: Miscellaneous 30.00 Apr. 30 Cash 30.00 Control Features: Use of a Bank

45. The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is: a. outstanding checks. b. deposit in transit. c. a bank error. d. bank service charges. Review Question SO 7 Prepare a bank reconciliation. Control Features: Use of a Bank

47. Q8-23 . Lori Figgs is confused about the lack of agreement between the cash balance per books and the balance per the bank. Explain the causes for the lack of agreement to Lori, and give an example of each cause. See notes page for discussion Discussion Question SO 7 Prepare a bank reconciliation. Control Features: Use of a Bank

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