1 © copyright doug hillman 2000 internal control and cash

1© Copyright Doug Hillman 2000

Internal Control and Cash


Internal Control

Policies and procedures for protecting assets from improper use


Internal Control

Policies and procedures for protecting assets from improper use and for the detection and prevention of errors or irregularities in accounting


Elements of the Internal Control Structure

Control Environment Accounting System Control Procedures


Control Environment

Management’s philosophy and operating style

Organizational structure Audit committee of board of directors Assigning authority and responsibility Controlling performance Policies and practices


Accounting System

Identification and recording of all valid transactions

Proper classification of transactions Proper measurement of dollar amount Assignment to proper period Proper presentation in financial

statements and notes


Control Procedures

Proper authorization of transactions and activities

Separation of duties Documents and records Safeguard over access to assets and

records Review of internal control system


Cash

Deposits in checking and savings accounts and any item bank customarily accepts for immediate deposit

Challenge is to control inflows and outflows of cash


Internal Control of Cash

Clear separation of duties and responsibilities among those who handle and account for cash

Proper equipment Proper authorization for payment Organization of flow so that work of one

person checked by another Periodic testing of controls


Petty Cash Fund

Special fund of cash used for small payments

Establishment

» Imprest amount debited to asset account Petty Cash


Petty Cash Fund

Expenditures

» No entry

» Evidenced by petty cash voucher Replenishment

» Check written to bring fund back to imprest amount

» Record expenses evidenced by petty cash vouchers


Petty Cash Fund

Cash Over and Short

» When amount to replenish does not equal vouchers


Bank Checking Account

Monthly bank statement conceptually a mirror image of company’s cash account

Timing differences in recording of deposits and clearing of checks causes difference in balance between bank and books.

Requires reconciliation


Bank Reconciliation

Uses a record of an independent organization to prove the company’s records

Shows the items that account for the difference between Cash account balance and bank statement balance.


Bank Reconciliation Procedures

Compare deposits shown on bank statement with debits to Cash» Deposits late in period not on bank

statement are deposits in transit Compare checks clearing bank with

credits to Cash» Checks not clearing bank are checks

outstanding


Bank Reconciliation Procedures

Compare bank debit and credit memos to books to see if they have been recorded

List any errors as amounts are compared


Bank Reconciliation Per Books

Add increases in cash already recorded by bank but not book

Deduct decreases in cash already recorded by bank but not book

Add or deduct errors on books


Bank Reconciliation Per Bank

Add increases in cash recorded on book but not bank

» Deposits in transit Deduct decreases in cash already

recorded on books but not bank

» Checks outstanding Add or deduct errors by bank


Bank Reconciliation

Journalize reconciling items from book side not recorded

Reconciliation not complete until all items have cleared

May take several months before we know that a specific month’s adjusted balance is in fact correct


Analyzing Information

Is balance higher or lower than previous year?

What restrictions exist on cash?

» Compensating balances Where is cash invested?


Comprehensive Analysis Case: Income Statement

Are total revenues higher or lower? What is percent change in revenues? Is percent of cost of goods sold to total

revenues increasing or decreasing? Is percent of total operating expenses to

total revenues increasing or decreasing? Is percent of net income to total revenues

increasing or decreasing?


Comprehensive Analysis Case: Balance Sheet

Are total assets higher or lower? What is percent change in total assets? What are largest asset investments? Are largest asset investments increasing

faster or slower than percent change in total revenues?

Is percent total liabilities to total liabilities plus owners’ equity increasing or decreasing?


Comprehensive Analysis Case: Integrative

Is the company operating more or less efficiently using the least amount of assets to generate a given level of total revenues

Compute total asset turnover


Comp. Analysis Case: Short-term Liquidity Ratios

Current ratio Quick ratio Accounts receivable turnover Inventory turnover Is ration better or worse than previous

year?


Comp. Analysis Case: Profitability Ratio

Return on total assets

» Profit margin

» Total asset turnover Is ROA better or worse than prior years?

1 © copyright doug hillman 2000 internal control and cash

Documents

copyright doug hillman

internal control of

outflows of cash slide

cash deposits

control procedures slide

cash checks

petty cash fund

accounting slide