Lecture International accounting: Chapter 6 - Nguyễn Quốc Nhất

International Financial Accounting<br /> <br /> CHAPTER 6: INTERNAL CONTROL<br /> AND CASH<br /> <br /> LOGO<br /> Learning of objective:<br /> •<br /> <br /> Define internal control and explain why it is needed.<br /> <br /> •<br /> <br /> Explain the common principles and limitations of internal<br /> control.<br /> <br /> •<br /> <br /> Describe the operation of voucher and petty cash systems.<br /> <br /> •<br /> <br /> Prepare a bank reconciliation.<br /> <br /> •<br /> <br /> International Accounting of Financial<br /> <br /> Apply internal control principles to cash receipts and payments.<br /> <br /> •<br /> <br /> Describe the reporting of cash and cash equivalents.<br /> <br /> MA. Nguyen Quoc Nhat<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 2<br /> <br /> 6.1 INTERNAL CONTROL<br /> Definition<br /> In business, internal control is defined as the methods<br /> an organization uses to protect against the theft of assets,<br /> enhance the reliability of accounting information, promote<br /> efficient and effective operations, and ensure compliance with<br /> applicable laws, regulations, and codes of ethical conduct.<br /> <br /> Table of content<br /> <br /> 6.1 Internal Control<br /> 6.2 The Sarbanes-Oxley Act (SOX)<br /> 6.3 The Components of Internal Control<br /> 6.4 Internal Controls for E-Commerce<br /> 6.5 The Bank Account as a Control Device<br /> 6.6 The Bank Reconciliation<br /> 6.7 Internal Control over Cash Receipts<br /> 6.8 Internal Control over Cash Payments<br /> 6.9 The Petty Cash Fund<br /> 6.10 Ethics and Accounting<br /> INTERNAL CONTROL AND CASH<br /> <br /> 3<br /> <br /> 6.2 THE SARBANES-OXLEY ACT (SOX)<br /> <br /> 4<br /> <br /> 6.3 THE COMPONENTS OF INTERNAL CONTROL<br /> <br /> Although internal control is essential to businesses of<br /> all sizes, it has become one of the most important issues facing<br /> public companies today. The first decade of this century<br /> brought several high-profile accounting scandals involving<br /> Enron, WorldCom, and a number of other publicly owned<br /> companies. To restore investor confidence and improve the<br /> quality of financial reporting in the United States, the U.S.<br /> Congress passed the Sarbanes-Oxley (SOX) Act of 2002 .<br /> This new act has led public companies to strengthen their<br /> internal controls and to better inform financial statement users<br /> of their effectiveness in producing accurate financial<br /> statements and preventing fraud.<br /> INTERNAL CONTROL AND CASH<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 5<br /> <br /> MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com<br /> <br /> A business can achieve its internal control<br /> objectives by applying five components.<br /> ● Monitoring of controls<br /> ● Information system<br /> ● Control procedures<br /> ● Control Environment<br /> ● Risk assessment<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 6<br /> <br /> 1<br /> <br /> International Financial Accounting<br /> <br /> CHAPTER 6: INTERNAL CONTROL<br /> AND CASH<br /> <br /> 6.3 THE COMPONENTS OF INTERNAL CONTROL<br /> <br /> 6.3 THE COMPONENTS OF INTERNAL CONTROL<br /> <br /> Monitoring of Controls<br /> Companies hire auditors to monitor their controls.<br /> Internal auditors are employees of the business<br /> who ensure that the company’s employees are following<br /> company, policies and that operations are running<br /> efficiently. Internal auditors also determine whether the<br /> company is following legal requirements to monitor<br /> internal controls to safeguard assets.<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> Information System<br /> As we have seen, the information system is critical.<br /> Controls must be in place within the information system<br /> to ensure that only authorized users have access to various<br /> parts of the accounting information system. Additionally,<br /> controls must be in place to<br /> insure adequate approvals for recorded transactions are in<br /> place. The decision makers<br /> need accurate information to keep track of assets and<br /> measure profits and losses.<br /> <br /> 7<br /> <br /> 6.3 THE COMPONENTS OF INTERNAL CONTROL<br /> <br /> Control Environment<br /> The control environment is the “tone at the top” of the<br /> business. It starts with the owner<br /> or CEO and the top managers. They must behave<br /> honorably to set a good example for<br /> company employees. Each must demonstrate the<br /> importance of internal controls if he or<br /> she expects the employees to take the controls seriously<br /> <br /> 9<br /> <br /> 6.3 THE COMPONENTS OF INTERNAL CONTROL<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 10<br /> <br /> 6.4 INTERNAL CONTROLS FOR E-COMMERCE<br /> <br /> Risk Assessment<br /> A company must identify its risks. For example, Kraft<br /> Foods faces the risk that its food<br /> products may harm people, American Airlines planes<br /> may crash, and all companies face the risk of bankruptcy.<br /> Companies facing difficulties might be tempted to falsify<br /> the financial statements to make themselves look better<br /> than they really are. As part of the internal control system,<br /> the company’s business risk must be assessed. The higher<br /> the risk, the more controls must be in place to safeguard<br /> the company’s assets.<br /> INTERNAL CONTROL AND CASH<br /> <br /> 8<br /> <br /> 6.3 THE COMPONENTS OF INTERNAL CONTROL<br /> <br /> Control Procedures<br /> Control procedures are designed to ensure that the<br /> business’s goals are achieved.<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 11<br /> <br /> MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com<br /> <br /> Whether the business is Smart Touch, Microsoft,<br /> all companies<br /> need the following internal control procedures:<br /> - Competent, Reliable, and Ethical Personnel<br /> - Assignment of Responsibilities<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 12<br /> <br /> 2<br /> <br /> International Financial Accounting<br /> <br /> CHAPTER 6: INTERNAL CONTROL<br /> AND CASH<br /> <br /> 6.4 INTERNAL CONTROLS FOR E-COMMERCE<br /> <br /> 6.4 INTERNAL CONTROLS FOR E-COMMERCE<br /> <br /> Competent, Reliable, and Ethical Personnel<br /> Employees should be competent, reliable, and<br /> ethical. Paying good salaries will<br /> attract high-quality employees. Employees should also be<br /> trained to do the job and<br /> their work should be adequately supervised.<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 13<br /> <br /> 6.4 INTERNAL CONTROLS FOR E-COMMERCE<br /> <br /> - Separate operations from accounting.<br /> - Separate the custody of assets from accounting.<br /> <br /> 15<br /> <br /> 6.4 INTERNAL CONTROLS FOR E-COMMERCE<br /> <br /> 14<br /> <br /> 1. Separate operations from accounting.<br /> Accounting should be completely separate from the<br /> perating departments, such as production and sales. What<br /> would happen if sales personnel recorded the company’s<br /> revenue? Sales figures could be inflated, and then top<br /> managers would not know how much the company<br /> actually sold.<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 16<br /> <br /> 6.5 THE BANK ACCOUNT AS A CONTROL DEVICE<br /> <br /> 2. Separate the custody of assets from<br /> accounting. Accountants must not handle cash, and<br /> ashiers must not have access to the accounting records. If<br /> one employee has both duties, the employee could steal<br /> cash and conceal the theft in the accounting records. The<br /> treasurer of a company handles cash, and the controller<br /> accounts for the cash.<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 6.4 INTERNAL CONTROLS FOR E-COMMERCE<br /> <br /> Smart management divides responsibility between<br /> two or more people. Separation of duties limits fraud and<br /> promotes the accuracy of the accounting records.<br /> Separation of duties can be divided into two parts:<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> Assignment of Responsibilities<br /> In a business with good internal controls, no duty is<br /> overlooked. Each employee has certain responsibilities. At<br /> Smart Touch, Sheena Bright is the president. Suppose she<br /> writes the checks in order to control cash payments. She<br /> lets Andrew, her brother, do the accounting. In a large<br /> company, the person in charge of writing checks is called<br /> the treasurer. The chief accounting officer is called the<br /> controller.<br /> <br /> 17<br /> <br /> MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com<br /> <br /> Cash is the most liquid asset because it is the<br /> medium of exchange. Cash is easy to conceal and<br /> elatively easy to steal. As a result, most businesses create<br /> specific controls for cash.<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 18<br /> <br /> 3<br /> <br /> International Financial Accounting<br /> <br /> CHAPTER 6: INTERNAL CONTROL<br /> AND CASH<br /> <br /> 6.5 THE BANK ACCOUNT AS A CONTROL DEVICE<br /> <br /> 6.5 THE BANK ACCOUNT AS A CONTROL DEVICE<br /> <br /> Keeping cash in a bank account helps control cash<br /> because banks have established practices for afeguarding<br /> customers’ money. The controls of a bank account include<br /> the following:<br /> ● Signature card<br /> ● Deposit ticket<br /> ● Check<br /> ● Bank statement<br /> ● Electronic funds transfers<br /> ● Bank reconciliation<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 19<br /> <br /> 6.5 THE BANK ACCOUNT AS A CONTROL DEVICE<br /> <br /> 20<br /> <br /> Check<br /> To pay cash, the depositor writes a check, which is a<br /> written, pre-numbered document that tells the bank to pay<br /> the designated party a specified amount. There are three<br /> parties to a check:<br /> ● The maker, who signs the check<br /> ● The payee, to whom the check is paid<br /> ● The bank, on which the check is drawn<br /> <br /> 21<br /> <br /> 6.5 THE BANK ACCOUNT AS A CONTROL DEVICE<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 22<br /> <br /> 6.5 THE BANK ACCOUNT AS A CONTROL DEVICE<br /> <br /> Bank Statement<br /> Banks send monthly statements to customers. A bank<br /> statement reports what the bank did with the customer’s<br /> cash. The statement shows the account’s beginning<br /> and ending balances, cash receipts, and payments.<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 6.5 THE BANK ACCOUNT AS A CONTROL DEVICE<br /> <br /> Deposit Ticket<br /> Banks supply standard forms such as deposit tickets.<br /> Completed by the customer,the deposit ticket shows the<br /> amount of each deposit. As proof of the transaction, the<br /> customer keeps a deposit receipt.<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> Signature Card<br /> Banks require each person authorized to sign on an<br /> account to provide a signature card. The signature card<br /> shows each authorized person’s signature. This helps<br /> protect against forgery.<br /> <br /> 23<br /> <br /> MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com<br /> <br /> Electronic Funds Transfer<br /> Electronic funds transfer (EFT) moves cash by electronic<br /> communication. It is<br /> cheaper to pay without having to mail a check, so many<br /> people pay their mortgage,<br /> rent, and insurance by EFT.<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 24<br /> <br /> 4<br /> <br /> International Financial Accounting<br /> <br /> CHAPTER 6: INTERNAL CONTROL<br /> AND CASH<br /> <br /> 6.5 THE BANK ACCOUNT AS A CONTROL DEVICE<br /> <br /> 6.6 THE BANK RECONCILIATION<br /> <br /> Bank Reconciliation<br /> Preparing a bank reconciliation is considered a control<br /> over cash. The bank reconciliation reconciles on a<br /> specific date the differences between cash on the<br /> company’s books and cash according to the bank’s<br /> records. The preparation of the bank reconciliation is<br /> discussed in detail in the following section.<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> There are two records of a business’s cash:<br /> 1. The Cash account in the company’s general ledger.<br /> Exhibit 6-1 shows that Smart Touch’s ending cash balance<br /> is $21,000. Prepare a bank reconciliation and journalize<br /> the related entries<br /> 2. The bank statement, which shows the cash receipts and<br /> payments transacted<br /> through the bank. In Exhibit 6-2, however, the bank shows<br /> an ending balance of $14,070 for Smart Touch.<br /> <br /> 25<br /> <br /> 6.6 THE BANK RECONCILIATION<br /> <br /> 27<br /> <br /> 6.6 THE BANK RECONCILIATION<br /> <br /> ● Likewise, a company immediately adds the cash receipt<br /> for all its deposits. But it may take a day or two for the<br /> bank to add deposits to the company’s balance.<br /> ● EFT payments and cash receipts are often recorded by<br /> the bank before a company<br /> learns of them. (We will discuss this in more detail later.)<br /> EFT<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 28<br /> <br /> 6.6 THE BANK RECONCILIATION<br /> <br /> Preparing the Bank Reconciliation<br /> Here are the items that appear on a bank reconciliation.<br /> They all cause differences<br /> between the bank balance and the book balance.<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 26<br /> <br /> 6.6 THE BANK RECONCILIATION<br /> <br /> The books and the bank statement usually show<br /> different cash balances.<br /> Differences arise because of a time lag in recording<br /> transactions, called timing differences. Three examples<br /> of timing differences follow:<br /> ● When a business writes a check, it immediately deducts<br /> the amount in its checkbook. But the bank does not<br /> subtract the check from the company’s account until the<br /> bank pays the check a few days later.<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> Bank Side of the Reconciliation<br /> The bank side contains items not yet recorded by the<br /> bank, but recorded by the company or errors made by the<br /> bank. These items include the following:<br /> 1. Deposits in transit<br /> 2. Outstanding checks.<br /> 3. Bank errors.<br /> <br /> 29<br /> <br /> MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com<br /> <br /> INTERNAL CONTROL AND CASH<br /> <br /> 30<br /> <br /> 5<br /> <br />