Internal Control protect the assets and ensure that business information is accurate and ensure that regulations are being followed.

Transcription

1 ACCT 101 Chapter 6 Internal Control protect the assets and ensure that business information is accurate and ensure that regulations are being followed. Three Objectives of Internal Control Assets are safeguarded and used only for business purposes Business information is accurate Employees comply with laws and regulations Employee fraud is the intentional act of deceiving an employer for personal gain. It is very difficult to detect collusion between 2 or more employees Internal Controls protect the company and the employee by limiting temptation and taking away suspicion Sarbanes Oxley Act of 2002 Law that requires publicly traded companies to maintain adequate systems of internal control. Outside, independent auditors must attest to the adequacy of the internal control system Failure results in fines or imprisonment Five Elements of Internal Control 1. The Control Environment management philosophy and operating style (if management does not seem to care, employees will get the idea that it is okay to misuse company assets; if management sends the message that it is not okay, employees less likely to misuse company assets) 2. Risk Assessment all business have risk, the more risk a business has, the more stringent the internal controls should be. 3. Control Procedures What procedures can we follow to help accomplish the objectives of internal control? Competent Personnel make sure we screen applicants to make sure they understand how to do their job. Rotating Duties don t leave the same person in charge of the same tasks all the time. Rotate employees through the different job responsibilities within their department. Mandatory Vacations make employees take their vacation time. When someone else performs their job while they are on vacation, any discrepancies will be found. 1

2 Separation of Duties separate the tasks required to complete the job so the employees are checking each others work and one person does not have complete control. Custody of Assets separate from Accounting Operations have different people responsible for the warehouse than those that are responsible for tracking inventory in the computer. Proofs and Security Measures have checks and balances to verify the completeness and accuracy of employee s work, such as having a supervisor review work once completed 4. Monitoring- warning signals/clues indicating dishonesty or fraud 5. Information and Communication- gather information to assess and monitor internal controls Preventative vs. Detective Controls Preventative seek to prevent the fraud from occurring in the first place. Such as: separation of duties, cameras, mandatory vacations Detective to detect theft or misuse of assets if it should get past the preventative controls Such as: supervisor review, bank reconciliations Limitations of Internal Controls Designed to provide reasonable assurance of proper safeguarding of assets and reliability of the accounting records Human Error Human Fraud Effectiveness reduced by collusions Cost for establishing should not exceed the benefits Size of business limits ability to establish Cash the asset most susceptible to fraudulent activities readily convertible to other assets easily concealed and transported highly desired Cash Equivalents = Short-term, highly liquid investment asses that are readily convertible to known cash amount and sufficiently close to their due date so that their market value is not sensitive to interest rate changes. 2

3 Use of a Bank Bank reconciliation - The process of comparing the bank's account balance with the company's balance, and explaining the differences to make them agree. Differences are usually due to info that one party has that the other doesn t. Bank statement - A statement received monthly from the bank that shows the depositor's bank transactions and balances. Includes: Beginning of period balance Checks paid and other debits decreasing the account Deposits and other credits increasing the account End of period balance Bank statements are prepared from the bank's perspective therefore every deposit the bank receives is an increase in the bank's liabilities (a credit) NSF check - A check that is not paid by a bank because of insufficient funds in a bank account. - creates an accounts receivable for the depositor and reduces cash in the bank account Reconciling the bank account Bank balance and book balance seldom agree because 1. Time lags 2. Errors Steps to reveal all the reconciling items that cause the difference between the balances PUT IT WHERE IT ISN T 1. Deposits in transit - Deposits recorded by the depositor that have not been recorded by the bank. - to balance per bank 2. Outstanding checks - Checks issued and recorded by a company that have not been paid by the bank. - from balance per bank 3. Errors -All errors made by the depositor are reconciling items on cash per books -All errors made by bank are reconciling items on cash per bank 4. Bank memoranda -Bank service charges 5. Note and interest collections -Collected by bank on behalf of company Bal. Per Bank : : Adjusted Bal. Per Bank Date like Balance Sheet Bal. Per General Ledger : : Adjusted Bal. Per General Ledger 3

4 Balance per Bank XXXX Balance per Books XXXX : Deposits in Transit : Notes collected by bank (wire transfers) : Outstanding Checks : service charges NSF checks Adjusted Balance XXXX Adjusted Balance XXXX These two balances must agree Errors could go in any of the four reconciling areas depending on who made the error (the company or the bank) and whether we get more money in our account or have to pay more money. A. Adjustments needed for the additions (DR to Cash) and deductions (CR to Cash) on the Balance per Books side of the bank reconciliation. All reconciling items on the Balance per Bank side will take care of themselves. If the bank made an error the company should call them and inform them to correct it. B. After adjustments, cash balance per books should equal the adjusted balance per the bank reconciliation. Place an x in the appropriate column to indicate whether the item should be added to or deducted from the book or bank balance, or whether it should not appear on the reconciliation. If the book balance is to be adjusted, place a Dr. or Cr. in the Adjust column to indicate whether the Cash balance should be debited or credited. 1. NSF check from customer is returned on September 25 but not yet recorded by this company. 2. Interest earned on the September cash balance in the bank. 3. Deposit made on September 5 and processed by the bank on September Checks written by another depositor but charged against this company s account. 5. Bank service charge for September. 6. Checks outstanding on August 31 that cleared the bank in September. 7. Check written against the company s account and cleared by the bank; erroneously not recorded by the company s recordkeeper. 8. Principal and interest on a note receivable to this company is collected by the bank but not yet recorded by the company. 9. Checks written and mailed to payees on October Checks written by the company and mailed to payees on September Night deposit made on September 30 after the bank closed. 12. Special bank charge for collection of note in part 8 on this company s behalf. 4

5 Bank Balance Book Balance Not Shown on Adjust Reconciliation 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) Del Gato Clinic deposits all cash receipts on the day when they are received and it makes all cash payments by check. At the close of business on June 30, 2017, its Cash account shows an $11,589 debit balance. Del Gato Clinic s June 30 bank statement shows $10,555 on deposit in the bank. Prepare a bank reconciliation and the adjusting entries for Del Gato Clinic using the following information: a. Outstanding checks as of June 30 total $1,829. b. The June 30 bank statement lists a $16 bank service charge. c. Check No. 919, listed with the canceled checks, was correctly drawn for $467 in payment of a utility bill on June 15. Del Gato Clinic mistakenly recorded it with a debit to Utilities Expense and a credit to Cash in the amount of $476. d. The June 30 cash receipts of $2,856 were placed in the bank s night depository after banking hours and were not recorded on the June 30 bank statement. Bank statement balance... Book balance 5

6 Adjusted bank balance... Adjusted book balance... GENERAL JOURNAL Page Date Description Post ref Debit Credit Wright Company deposits all cash receipts on the day when they are received and it makes all cash payments by check. At the close of business on May 31, 2017, its Cash account shows a $27,500 debit balance. The company s May 31 bank statement shows $25,800 on deposit in the bank. Prepare a bank reconciliation for the company using the following information. a. The May 31 bank statement lists $100 in bank service charges; the company has not yet recorded the cost of these services. b. Outstanding checks as of May 31 total $5,600. c. May 31 cash receipts of $6,200 were placed in the bank s night depository after banking hours and were not recorded on the May 31 bank statement. d. In reviewing the bank statement, a $400 check written by Smith Company was mistakenly drawn against Wright s account. e. The bank statement shows a $600 NSF check from a customer; the company has not yet recorded this NSF check. Bank statement balance... Book balance 6

7 Adjusted bank balance... Adjusted book balance... The following information is available to reconcile Severino Co. s book balance of cash with its bank statement cash balance as of December 31, a. The December 31 cash balance according to the accounting records is $32,878.30, and the bank statement cash balance for that date is $46, b. Check No for $4, and Check No for $400, both written and entered in the accounting records in December, are not among the canceled checks. Two checks, No for $2,289 and No for $410.40, were outstanding on the most recent November 30 reconciliation. Check No is listed with the December canceled checks, but Check No is not. c. When the December checks are compared with entries in the accounting records, it is found that Check No had been correctly drawn for $3,456 to pay for office supplies but was erroneously entered in the accounting records as $3,465. d. Two memoranda are enclosed with the statement and are unrecorded at the time of the reconciliation. The first is for a $ charge that dealt with an NSF check for $745 received from a customer, Titus Industries, in payment of its account. The bank assessed a $17.50 fee for processing it. The second is $99 in miscellaneous expenses for check printing. e. The bank statement shows that the bank collected $19,000 cash on a note receivable for the company, deducted a $20 collection expense, and credited the balance to the company s Cash account. Severino did not record this transaction before receiving the statement. f. Severino s December 31 daily cash receipts of $9, were placed in the bank s night depository on that date but do not appear on the December 31 bank statement. Required 1. Prepare the bank reconciliation for this company as of December 31, Prepare the journal entries (in dollars and cents) necessary to bring the company s book balance of cash into conformity with the reconciled cash balance as of December 31, Explain the nature of the communications conveyed by a bank when the bank sends the depositor (a) a debit memorandum and (b) a credit memorandum. Bank statement balance... Book balance 7

8 Adjusted bank balance... Adjusted book balance... GENERAL JOURNAL Page Date Description Post ref Debit Credit Shamara Systems most recently reconciled its bank balance on April 30 and reported two checks outstanding at that time, No for $781 and No for $1, The following information is available for its May 31, 2017, reconciliation. Check No is correctly drawn for $654 to pay for May utilities; however, the recordkeeper misread the amount and entered it in the accounting records with a debit to Utilities Expense and a credit to Cash for $644. The bank paid and deducted the correct amount. The NSF check shown in the statement originally received from a customer, W. Sox, in payment of her account. The company has not yet recorded its return. The credit memorandum (CM) is from a $7,400 note that the bank collected for the company. The bank deducted a $50 collection expense and deposited the remainder in the company s account. The collection and expense have not yet been recorded. Required 1. Prepare the May 31, 2017, bank reconciliation for Shamara Systems. 2. Prepare the journal entries (in dollars and cents) to adjust the book balance of cash to the reconciled balance. 3. The bank statement reveals that some of the prenumbered checks in the sequence are missing. Describe three possible situations to explain this. 8

9 9

10 Bank statement balance... Book balance Adjusted bank balance... Adjusted book balance... GENERAL JOURNAL Date Description Post ref Debit Page Credit Petty Cash small amount of cash kept on hand for incidental purchases. A. The only time the petty cash account is affected is when the fund is established or the amount of the fund is increased or decreased. Check is cashed and proceeds given to petty cashier. Entry to establish Petty Cash Fund DR Petty Cash XXX CR Cash XXX 10

11 B. Patty cash payments report and all receipts are given to the company cashier in exchange for a check to reimburse the fund. The petty cashier cashes the check and puts the cash in the petty cashbox. Entry to replenish petty cash. DR Expenses XXX CR Cash XXX Waupaca Company establishes a $350 petty cash fund on September 9. On September 30, the fund shows $104 in cash along with receipts for the following expenditures: transportation-in, $40; postage expenses, $123; and miscellaneous expenses, $80. The petty cashier could not account for a $3 shortage in the fund. The company uses the perpetual system in accounting for merchandise inventory. Prepare (1) the September 9 entry to establish the fund, (2) the September 30 entry to reimburse the fund, and (3) an October 1 entry to increase the fund to $400. GENERAL JOURNAL Page Date Description Post ref Debit Credit Cash Over and Short Ups and downs are expected. Should monitor for employees who are consistently Short and never Over. If it is too large, you may have a problem. Typically a debit balance since customers will dispute being short changed rather than over Combined with miscellaneous expense Book it: DR: Cash 395 DR: Cash Over and Short 5 CR: Sales