Lecture International accounting: Chapter 6 - Nguyễn Quốc Nhất

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Lecture International accounting: Chapter 6 - Nguyễn Quốc Nhất

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Lecture "International accounting - Chapter 6: Internal control and cash" has content: Internal control, the sarbanes - oxleyact (SOX), the components of internal control, internal controls for e commerce, the bank account as a control device, the bank reconciliation,... and other contrens.

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Nội dung Text: Lecture International accounting: Chapter 6 - Nguyễn Quốc Nhất

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