Financial accounting 12th warren duchac chapter 08

Sarbanes-Oxley, Internal Control, and Cash

Chapter 8
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Prepared by: C. Douglas Cloud
Professor Emeritus of
Accounting
Pepperdine University


Learning Objective 1
1. Describe the Sarbanes-Oxley Act of 2002

and its impact on internal controls and
financial reporting.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 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.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 1

Sarbanes-Oxley Act of 2002
 Internal control is broadly defined as the
procedures and processes used by a
company to:

 Safeguard its assets.
 Process information accurately.
 Ensure compliance with laws and
regulations.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


Learning Objective 2
1. Describe the Sarbanes-Oxley Act of 2002
and its impact on internal controls and
financial reporting.
2. Describe and illustrate the objectives and
elements of internal control.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 2

Elements of Internal Control
 Employee fraud is the intentional act of
deceiving an employer for personal gain.
 Management is responsible for designing
and applying five elements of internal
control to meet the three internal control
objectives. These elements are control

environment, risk assessment, control
procedures, monitoring, information and
communication.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 2

Control Environment
 The control environment is the overall
attitude of management and employees
about the importance of controls. Three
factors influencing a company’s control
environment are as follows:
 Management’s philosophy and operating style
 The company’s organizational structure
 The company’s personnel policies

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 2

Control Procedures
 Control procedures provide reasonable
assurance that business goals will be
achieved. Control procedures include the
following:

 Competent personnel, rotating duties, and
mandatory vacations
 Separating responsibilities for related operations
 Separating operations, custody of assets, and
accounting
 Proofs and security measures
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 2

Monitoring
 Monitoring the internal control system is
used to locate weaknesses and improve
controls.
 Monitoring often includes observing
employee behavior and the accounting
system for indicators of control problems.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 2

Limitations of Internal Control
 Internal controls can provide only
reasonable assurance for safeguarding
assets, processing accurate information,

and compliance with laws and regulations.
This is due to the following factors:

 The human element of controls
 Cost-benefit considerations

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


Learning Objective 3
1. Describe the Sarbanes-Oxley Act of 2002
and the impact on internal controls and
financial reporting.
2. Describe and illustrate the objectives and
elements of internal control.
3. Describe and illustrate the application of
internal controls to cash.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 3

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.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 3

Control of Cash Receipts
 Businesses normally receive cash from two
main sources:
 Customers purchasing products or services
 Customers making payments on account

 One of the most important controls to
protect cash received in over-the-counter
sales is a cash register.
 A predetermined amount of money that is
given to each cash register clerk in a cash
drawer is called a change fund.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 3

Control of Cash Receipts
 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.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 3

Cash Received from Cash Sales
 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:

 If there had been cash over, Cash Short and
Over would have been credited for the overage.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 3
Cash Received in the Mail and by EFT

 Cash is received in the mail when customers
pay their bills. Most companies design their

invoices so that customers return a portion
of the invoice, called a remittance advice,
with their payment.
 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.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 3

Cash Received by EFT
 Companies encourage customers to use
EFT for the following reasons:
1. EFTs cost less than receiving cash payments
through the mail.
2. EFTs enhance internal controls over cash since the
cash is received directly by the bank without any
employees handling cash.
3. EFTs reduce late payments from customers and
speed up the processing of cash receipts.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 3

Control of Cash Payments
 The control of cash payments should
provide reasonable assurance that:

 Payments are made for only authorized
transactions.
 Cash is used effectively and efficiently.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 3

Voucher System
 A voucher system is a set of procedures for
authorizing and recording liabilities and
cash payments. It may be either manual or
computerized.
 A voucher is any document that serves as
proof of authority to pay cash or issue an
electronic funds transfer.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


Learning Objective 4
1. Describe the Sarbanes-Oxley Act of 2002

and the impact on internal controls and
financial reporting.
2. Describe and illustrate the objectives and
elements of internal control.
3. Describe and illustrate the application of
internal controls to cash.
4. Describe the nature of a bank account and
its use in controlling cash.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 4

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:
 Bank accounts reduce the amount of cash on hand.
 Bank accounts provide an independent recording of
cash transactions.
 Use of bank accounts facilitates the transfer of funds
using EFT systems.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 4

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.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


Learning Objective 5
5. Describe and illustrate the use of a bank
reconciliation in controlling cash.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 5

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.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


LO 5

Power Networking Bank Reconciliation
Bank’s Records
Cash balance
$3,359.78

Power Networking’s Records

Step 1
Power Networking
prepares to reconcile
the monthly bank
statement as of July
31. The bank
statement shows an
ending cash balance
of $3,359.78.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.