Accounting principles 9e willey kieso chapter 08

Making deposits Writing checks Bank statements Reconciling the bank account Electronic funds transfer EFT systemCash receipts controls Cash disbursements controls a Bank Control Features

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Chapter 8-1

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Chapter

8-2

Fraud, Internal Control, and Cash

Accounting Principles, Ninth Edition

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Chapter

8-3

to cash receipts.

to cash disbursements.

Study Objectives Study Objectives

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Making deposits Writing checks Bank statements Reconciling the bank account Electronic funds transfer (EFT) system

Cash receipts controls

Cash disbursements controls

a Bank

Control Features: Use of

a Bank

Reporting Cash

Fraud, Internal Control, and Cash

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Chapter

8-5

Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.

Fraud and Internal Control

Fraud

SO 1 Define fraud and internal control.

Why does fraud occur?

Illustration 8-1

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Chapter 8-6

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continually verify that controls are working

The Sarbanes-Oxley Act

Independent auditors must attest to the adequacy

of internal control

Oversight Board (PCAOB).

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Under the Sarbanes-Oxley Act, all publicly traded U.S corporations are required to maintain an adequate system of internal control.

Internal Control

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Internal Control

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Chapter

8-10

Measures vary with

management’s assessment of the risks faced

size and nature of the company

SO 2 Identify the principles of internal control.

Principles of Internal Control Activities

Six principles of controls activities:

 Establishment of responsibility

 Segregation of duties

 Documentation procedures

 Physical controls

 Independent internal verification

 Human resource controls

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Chapter

8-11 SO 2 Identify the principles of internal control.

ESTABLISHMENT OF RESPONSIBILITY

Control is most effective when only one person is responsible

for a given task.

SEGREGATON OF DUTIES

Related duties, including physical custody and record

keeping, should be assigned to different individuals.

DOCUMENTATION PROCEDURES

Companies should use prenumbered documents for all

documents should be accounted for.

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Chapter

PHYSICAL CONTROLS Illustration 8-2

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2 Records verified by an

employee who is independent.

3 Discrepancies reported

to management.

Illustration 8-3

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Chapter

HUMAN RESOURCE CONTROLS

1 Bond employees.

2 Rotate employees’ duties and

require vacations.

3 Conduct background checks.

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Chapter 8-15

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Chapter

Limitations of Internal Control

Costs should not exceed benefit.

Human element.

Size of the business.

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Chapter

8-17

Cash Receipts Controls

SO 3 Explain the applications of internal control principles to cash receipts.

cash receipts (cashiers)

Segregation of Duties

Different individuals

receive cash, record

cash receipts, and hold

the cash

Documentation Procedures

Use remittance advice (mail receipts), cash register tapes, and deposit slips

Physical, Mechanical, and Electronic Controls

Store cash in safes and bank vaults; limit access to storage areas; use cash registers

Human Resource

Controls

Bond personnel who handle cash; require employees to take vacations; deposit all cash in bank daily Illustration 8-4

Cash Controls

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Chapter

8-18

Q8-6 At the corner grocery store, all sales clerks

make change out of one cash register drawer Is this

a violation of internal control? Why?

See notes page for discussion

Discussion Question

Cash Controls

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Chapter

8-19

Q8-11 The management of Sewell Company asks

you, as the company accountant, to explain (a) the

concept of reasonable assurance in internal control

and (b) the importance of the human factor in

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Chapter

8-20

Cash Controls

Cash consists of coins, currency, checks, money

orders, and money on hand or on deposit in a bank

Cash receipts come from:

cash sales collections on account from customers receipt of interest, rent, and dividends investments by owners

bank loans proceeds from the sale of noncurrent assets

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Copy of list sent to treasurer’s office for comparison with total shown on daily cash summary.

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Chapter

8-23

Permitting only designated personnel to handle

cash receipts is an application of the principle of:

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Chapter

8-24

Generally, internal control over cash disbursements

is more effective when companies pay by check,

rather than by cash.

Applications:

Voucher system Petty cash fund

Cash Controls

SO 4 Explain the applications of internal

control principles to cash disbursements.

Cash Disbursements Controls

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Establishment of

Responsibility

Only designated

personnel are authorized to sign

checks (treasurer) and

Use prenumbered checks; checks must have an approved invoice; require employees to use corporate credit cards for reimbursable expenses

Physical Controls

Store blank checks in safes, with limited access; print check amounts by machine in

to take vacations; conduct background

checks

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Chapter

8-26

Q8-17 Joe Griswold Company’s internal controls over

cash disbursements provide for the treasurer to sign

checks imprinted by a checkwriting machine in indelible

ink after comparing the check with the approved invoice

Identify the internal control principles that are present

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Chapter

8-27

The use of prenumbered checks in disbursing

cash is an application of the principle of:

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A voucher is an authorization form prepared for each expenditure.

Cash Controls

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Chapter

8-29

Petty Cash Fund - U sed to pay small amounts.

Involves:

Cash Controls

SO 5 Describe the operation of a petty cash fund.

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Chapter

8-30

Illustration: If Laird Company decides to establish a $100

fund on March 1, the journal entry is:

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Chapter

8-31

Illustration: Assume that on March 15 Laird’s petty cash

custodian requests a check for $87 The fund contains $13 cash and petty cash receipts for postage $44, freight-out $38, and miscellaneous expenses $5 The general journal entry to record the check is:

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Chapter

8-32

Illustration: Occasionally, the company may need to recognize

a cash shortage or overage Assume that Laird’s petty cash

custodian has only $12 in cash in the fund plus the receipts as listed The request for reimbursement would, therefore, be for

$88, and Laird would make the following entry:

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Chapter

8-33

Contributes to good internal control over cash.

Minimizes the amount of currency on hand.

Creates a double record of bank transactions Bank reconciliation.

Control Features: Use of a Bank

SO 6 Indicate the control features of a bank account.

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Chapter

8-34

Making Bank Deposits

Authorized employee

should make deposit.

Bank Code Numbers

Front Side Reverse Side

Illustration 8-8

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Chapter

8-35

Writing Checks

Written order signed by depositor directing bank to pay

a specified sum of money to a designated recipient.

Maker

Payee

Illustration 8-9

Payer

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Chapter

8-37

include:

a having bank auditors verify the correctness of

the bank balance per books

b minimizing the amount of cash that must be kept

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Chapter

8-38

Reconciling the Bank Account

SO 7 Prepare a bank reconciliation.

Reconcile balance per books and balance per bank to

their adjusted (corrected) cash balances.

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Illustration 8-11

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Chapter

8-41

Illustration: a) Prepare a bank reconciliation at April 30.

Cash balance per bank statement

Illustration 8-12

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Chapter

8-42

The company records each reconciling item used to determine

the adjusted cash balance per books.

Collection of Note Receivable: Assuming interest of $50 has not been accrued and collection fee is charged to

Miscellaneous Expense, the entry is:

Apr 30

Miscellaneous expense 15.00

Notes receivable1,000.00

Interest revenue50.00

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Chapter

8-43

Book Error: The cash disbursements journal shows that

check no 443 was a payment on account to Andrea Company,

a supplier The correcting entry is:

Apr 30

Accounts payable36.00

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Bank Service Charges: Depositors debit check printing

charges (DM) and other bank service charges (SC) to

Miscellaneous Expense The entry is:

Apr 30

Cash30.00

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Chapter

8-45

The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is:

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Chapter

8-46

Electronic Funds Transfers (EFT)

Disbursement systems that uses wire, telephone, or computers to transfer cash balances between locations.

EFT transfers normally result in better internal control since no cash or checks are handled by company employees.

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Chapter

8-47

Q8-23 Lori Figgs is confused about the lack of

agreement between the cash balance per books and the

balance per the bank Explain the causes for the lack of

agreement to Lori, and give an example of each cause

See notes page for discussion

Discussion Question

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Chapter

8-48

Reporting Cash

SO 8 Explain the reporting of cash.

Cash consists of coins, currency (paper money), checks,

money orders, and money on hand or on deposit in a bank

or similar depository

Cash equivalentsRestricted cashCompensating balances

Illustration 8-14

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Chapter

8-49

Which of the following statements correctly

describes the reporting of cash?

a Cash cannot be combined with cash equivalents.

b Restricted cash funds may be combined with

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Chapter

8-50

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