Financial accounting 12th warren duchac chapter 08

Sarbanes-Oxley, Internal Control, and Cash Chapter Student Version These Theseslides slidesshould shouldbe beviewed viewedusing usingthe thepresentation presentation mode mode(click (clickthe the icon icontotostart startpresentation) presentation) © 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 Prepared by: C Douglas Cloud Professor Emeritus of Accounting Pepperdine University Learning Objective 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 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 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 Describe the Sarbanes-Oxley Act of 2002 and its impact on internal controls and financial reporting 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 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 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 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 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 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 LO Power Networking Bank Reconciliation Error Check No 879 for $732.26 to Taylor Company on account was erroneously recorded in the journal as $723.26 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? 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.) © 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 Power Networking Bank Reconciliation Bank’s Records Cash balance $3,359.78 Add deposit not recorded by bank 816.20 Deduct outstanding checks: No 812 No 878 No 883 1,544.99 Adjusted balance Power Networking’s Records Cash balance $2,549.99 Add note and interest collected by bank 408.00 $4,175.98 Deduct check NSF $1,061.00 Bank service 435.39 charges 48.60 Error recording Chk No 879 $2,630.99 Error © 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 $2,957.99 $300.00 18.00 9.00 LO Power Networking Bank Reconciliation Bank’s Records Cash balance $3,359.78 Add deposit not recorded by bank 816.20 Deduct outstanding checks: No 812 No 878 No 883 1,544.99 Adjusted balance Power Networking’s Records Cash balance $2,549.99 Add note and interest collected by bank 408.00 $4,175.98 Deduct check NSF $1,061.00 Bank service 435.39 charges 48.60 Error recording Chk No 879 $2,630.99 Adjusted balance Step © 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 $2,957.99 $300.00 18.00 9.00 327.00 $2,630.99 LO Power Networking Bank Reconciliation Bank’s Records Cash balance $3,359.78 Add deposit not recorded by bank 816.20 Deduct outstanding checks: No 812 No 878 No 883 1,544.99 Adjusted balance Power Networking’s Records Cash balance $2,549.99 Add note and interest collected by bank 408.00 $4,175.98 Deduct check NSF $1,061.00 Bank service 435.39 charges 48.60 Error recording Chk No 879 $2,630.99 Adjusted balance Step © 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 $2,957.99 $300.00 18.00 9.00 327.00 $2,630.99 LO Power Networking Bank Reconciliation The journal entries for Power Networking, based on the bank reconciliation, are as follows: © 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 Describe and illustrate the use of a bank reconciliation in controlling cash Describe the accounting for specialpurpose cash funds © 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 Petty Cash Fund  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 A petty cash fund of $500 is established on August The entry to record the transaction is as follows: © 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 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 © 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 Special-Purpose Funds  Companies often use other cash funds for special needs, such as payroll or travel expenses Such funds are called specialpurpose funds © 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 Describe and illustrate the use of a bank reconciliation in controlling cash Describe the accounting for specialpurpose cash funds Describe and illustrate the reporting of cash and cash equivalents in the 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 Financial Statement Reporting of Cash  A company’s excess cash is normally invested in highly liquid investments These investments are called cash equivalents  Banks may require depositors to maintain minimum cash balances in their bank accounts Such a balance is called a compensating 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 Describe and illustrate the use of a bank reconciliation in controlling cash Describe the accounting for specialpurpose cash funds Describe and illustrate the reporting of cash and cash equivalents in the financial statements Describe and illustrate the use of the ratio of cash to monthly cash expenses to assess the ability of a company to continue in 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 Ratio of Cash to Monthly Cash Expenses  A cash ratio that is especially useful for startup companies or companies in financial distress is the ratio of cash to monthly cash expenses The ratio is computed as shown below: Cash as of Year-End Ratio of Cash to Monthly Cash Expenses = Monthly Cash Expenses © 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 Ratio of Cash to Monthly Cash Expenses  The cash, including any cash equivalents, is taken from the balance sheet as of year-end The monthly cash expenses, sometimes called cash burn, are estimated from the operating activities section of the statement of cash flows as follows: Negative Cash Flow from Operations Monthly Cash Expenses = 12 © 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 Sarbanes-Oxley, Internal Control, and Cash The End Student Version Prepared by: C Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 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 ... 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. ..Learning Objective 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,... Learning Objective Describe the Sarbanes-Oxley Act of 2002 and its impact on internal controls and financial reporting Describe and illustrate the objectives and elements of internal control © 2011