Sarbanes-Oxley Act of 2002

Transcription

1 Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 (often referred to simply as Sarbanes-Oxley) applies only to companies whose stock is traded on public exchanges. Its purpose is to restore public confidence and trust in the financial statements of companies. Sarbanes-Oxley requires companies to maintain strong and effective internal controls over the recording of transactions and the preparing of financial statements. Internal control is broadly defined as the procedures and processes used by a company to: 1. Safeguard its assets (by preventing theft, fraud, misuse). 2. Process information accurately (business information is accurate). 3. Ensure compliance with laws and regulations (and financial reporting standards). Limitation of internal control Internal controls are not a guarantee, due to the following factors: 1. The human elements of controls (human errors can occur because of confusion, misjudgment..etc.) 2. Cost-benefit considerations (cost of internal controls shouldn t exceed their benefits) Cash Controls over Receipts and Payments: Cash includes coins, currency (paper money), checks, and money orders. Money on deposit with a bank or other financial institution that is available for withdrawal is also considered cash. Cash is the asset most likely to be stolen or used improperly in a business. For this reason, Business must carefully control cash and cash transaction.

2 Control of Cash Receipts: Ø Businesses normally receive cash from two main sources: 1. Customers purchasing products or services. 2. Customers making payments on account. Ø One of the most important controls to protect cash received in over-thecounter sales is a cash register. Ø A predetermined amount of money that is given to each cash register clerk in a cash drawer is called a change fund. Ø Salespersons may make errors in making change for customers or in ringing up cash sales. As a result, the amount of cash on hand may differ from the amount of cash sales. Such differences are recorded in a Cash Short and over account. Cash Received from Cash Sales: v Cash sales for May 3 totaled $35,690 per the cash register tape. After removing the change fund, only $35,668 was left in the cash drawer. The cash sales and shortage would be recorded as follows: v If there had been cash over, Cash Short and over would have been credited for the overage. Cash Received by EFT v Cash may also be received from customers through electronic funds transfers (EFT). Customers may authorize automatic electronic transfers from their checking accounts to pay monthly bills. v EFT cost less, enhance internal control over cash, reduce late payments from customers and speed up the processing of cash receipts.

3 Control of Cash Payments The control of cash payments should provide reasonable assurance that: v Payments are made for only authorized transactions. v Cash is used effectively and efficiently. Voucher System v A voucher system is a set of procedures for authorizing and recording liabilities and cash payments. It may be either manual or computerized. v A voucher is any document that serves as proof of authority to pay cash or issue an electronic funds transfer. (Check page no.366 for further details). Bank Accounts: A major reason that businesses use bank accounts is for internal control. Some of the control advantages of using bank accounts are as follows: v Bank accounts reduce the amount of cash on hand. v Bank accounts provide an independent recording of cash transactions. v Use of bank accounts facilitates the transfer of funds using EFT systems. Bank Statement A summary received from the bank (usually monthly) of all checking account transactions is called a bank statement. It shows the beginning balance, additions, deductions, and the ending balance. Bank Reconciliation: A bank reconciliation is an analysis of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger. This is used to determine the adjusted cash balance. Bank reconciliation is usually divided into 2 sections: bank & company sections. Power Networking Bank Reconciliation: page

4 1. Power Networking prepares to reconcile the monthly bank statement as of July 31. The bank statement shows an ending cash balance of $3, A deposit on July 31 of $ is not recorded on the bank statement. 3. Three checks that were written during the month did not appear on the bank statement: No. 812, $1,061; No. 878, $435.39, No. 883, $ Determine the adjusted balance. 5. The cash balance in Power Networking s ledger on July 31 is $2, A credit memo on the bank statement indicates that the bank collected a note in the amount of $400 and the related interest of $8 for Power Networking. 7. A check from a customer (Thomas Ivey) for $300 was returned by the bank because of insufficient funds (NSF) as indicated by a debit memo. A bank service charge of $18 was also indicated by a debit memo. 8. Check No. 879 for $ to Taylor Company on account was erroneously recorded in the journal as $ When an error is made, two questions are asked: (1) Who made the error? (2) Does correcting the error cause the cash account to go up or down? 9. Power Networking made the error, so the item is placed on the company s side of the reconciliation. By correcting the error, the cash account goes down. (Thus, it is a deduction on the reconciliation.) Bank s Records Cash balance $3, Add deposit not recorded by bank $4, Deduct Outstanding checks: No. 812 $1,061 No No , Adjusted balance $ 2, Power Networking s Records Cash balance $2, Add note and interest collected by bank 408 $ 2, Deduct check NSF $300 Bank service charges 18 Error recording Chk. No Adjusted balance $2,630.99

5 The journal entries for Power Networking, based on the bank reconciliation, are as follows: Petty Cash Fund: v It is usually not practical for a business to write checks to pay small amounts. Thus, it is desirable to control such payments by using a special cash fund, called a petty cash fund. At the end of August, the petty cash receipts indicate expenditures for the following items: The entry to replenish the petty cash fund is shown below

6 Special-Purpose Funds Companies often use other cash funds for special needs, such as payroll or travel expenses. Such funds are called special-purpose funds. Financial Statement Reporting of Cash A company s excess cash is normally invested in highly liquid investments. These investments are called cash equivalents. Example: MOrnin Joe Balance sheet Decmber31,2012 Assets Current assets: Cash and cash equivalent. $235,000 Illustrative problem page PE 8-2A/ PE 8-2B page 382 PE8-3A, PE8-3B, PE8-4A, PE-4B page 383 EX8-12, EX8-13, EX8-16, EX8-17, EX8-18 page 387 EX8-19, EX8-22 page 388 (*Note that Nahla Al-Harbi work have been used in this doc.)