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Lecture Accounting principles (8th edition) – Chapter 8: Fraud, internal control, and cash

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In this chapter, the learning objectives are: Discuss fraud and the principles of internal control, identify the basic concepts of an accounting information system, describe the nature and purpose of a subsidiary ledger, explain how companies use special journals in journalizing.

Chapter 8-1 CHAPTER  INTERNAL CONTROL AND CASH Accounting Principles,  Eighth Edition Chapter 8-2 Study Objectives Study Objectives Define internal control Identify the principles of internal control Explain the applications of internal control principles to cash  receipts Explain the applications of internal control principles to cash  disbursements Describe the operation of a petty cash fund Indicate the control features of a bank account Prepare a bank reconciliation Explain the reporting of cash Chapter 8-3 Internal Control and Cash Internal Control and Cash Internal Internal Control Control Cash Cash Controls Controls The SarbanesOxley Act Principles Control over cash receipts Control over cash disbursements Limitations Chapter 8-4 Use Useof ofaa Bank Bank Making deposits Writing checks Bank statements Reconciling the bank account Reporting Reporting Cash Cash Cash equivalents Restricted cash Compensating balances Internal Control Internal Control Methods and measures adopted to: Safeguard assets.  Enhance accuracy and reliability of accounting records.   Reduce risk of: a Errors  (unintentional)  b Irregularities  (intentional) Under the Sarbanes­Oxley Act, all publicly traded U.S. corporations are required to maintain  an adequate system of internal control Chapter 8-5 LO 1  Define internal control Internal Control Internal Control The Sarbanes­Oxley Act Companies must  develop principles of control over financial reporting.   continually verify that controls are working.  Independent auditors must attest to the level of internal control.  SOX created the Public Company Accounting Oversight Board  (PCAOB) Chapter 8-6 LO 1  Define internal control Internal Control Internal Control Principles of Internal Control Illustration 8­1 Measures vary with size and nature of the  business management’s control  philosophy Chapter 8-7 LO 2  Identify the principles of internal control Internal Control Internal Control 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 Chapter 8-8 LO 2  Identify the principles of internal control Internal Control Internal Control Principles of Internal Control Illustration 8­3 PHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS Physical Mechanical  and Electronic Chapter 8-9 LO 2  Identify the principles of internal control Internal Control Internal Control Principles of Internal Control INDEPENDENT INTERNAL VERIFICATION Records periodically verified by an employee who is independent Discrepancies reported to  management OTHER CONTROLS Bond employees Rotate employees’ duties and require vacations Conduct background checks Chapter 8-10 LO 2  Identify the principles of internal control Use of a Bank Use of a Bank Contributes to good internal control over cash Minimizes the amount of currency on hand Creates a double record of bank transactions Bank reconciliation Chapter 8-30 LO 6 Indicate the control features of a bank account Use of a Bank Use of a Bank Illustration 8­10 Making Bank Deposits Authorized employee should make  deposit Front Side Chapter 8-31 Bank Code  Numbers Reverse Side LO 6 Indicate the control features of a bank account Use of a Bank Use of a Bank Writing Checks Illustration 8­11 Written order signed by depositor directing bank to pay a specified sum of  money to a designated recipient Maker Payee Payer Chapter 8-32 LO 6 Indicate the control features of a bank account Use of a Bank Use of a Bank Bank Statements Illustration 8­12 Debit Memorandum Bank service charge NSF (not sufficient funds) Credit Memorandum Collect notes receivable Interest earned Chapter 8-33 LO 6 Indicate the control features of a bank account Use of a Bank Use of a Bank Review Question The control features of a bank account do not include: a having bank auditors verify the correctness of the bank balance  per books.  b minimizing the amount of cash that must be kept on hand c providing a double record of all bank transactions d safeguarding cash by using a bank as a depository Chapter 8-34 LO 6 Indicate the control features of a bank account Use of a Bank Use of a Bank Reconciling the Bank Account Reconcile balance per books and balance per bank to their adjusted  (corrected) cash balances Reconciling Items: Deposits in transit Outstanding checks Errors Bank memoranda Chapter 8-35 LO 7  Prepare a bank reconciliation Use of a Bank Use of a Bank Reconciliation Procedures Illustration 8­13 + Deposit in Transit + Notes collected by bank - - NSF (bounced) checks - Check printing or other service charges Outstanding Checks +- Bank Errors +- Book Errors CORRECT BALANCE Chapter 8-36 CORRECT BALANCE LO 7  Prepare a bank reconciliation Use of a Bank Use of a Bank E8­11 The following information pertains to Family Video Company E8­11 Cash balance per bank, July 31, $7,263 Cash balance per books, July 31, $7,284 July bank service charge not recorded by the depositor $28 Deposits in transit, July 31, $1,500 Bank collected $900 note for Family in July, plus interest $36, less fee $20.The  collection has not been recorded by Family, and no interest has been accrued Outstanding checks, July 31, $591 Instructions a) Prepare a bank reconciliation at July 31 b) Journalize the adjusting entries at July 31 on the books of Family Video Company Chapter 8-37 LO 7  Prepare a bank reconciliation Use of a Bank Use of a Bank E8­11  a)  Prepare a bank reconciliation at July 31 E8­11   Cash balance per bank statement Add: Deposit in transit Less: Outstanding checks Adjusted cash balance per bank Cash balance per books Add: Collection of notes receivable Collection of interest Less: Bank service charge Note collection fee Adjusted cash balance per books Chapter 8-38 $7,263 1,500 (591) $8,172 $7,284 900 36 (28) (20) $8,172 LO 7  Prepare a bank reconciliation Use of a Bank Use of a Bank E8­11  b)  Journalize the adjusting entries at July 31 on the books of Family  E8­11   Video Company Dr Cr July 31   Miscellaneous expense 28 July 31      Cash                                               28 Cash                                      916 Miscellaneous expense            20 Interest revenue Notes receivable                             900  36 Note:  Adjusting journal entry includes only the adjustments to the cash  Note:   balance per books.  Chapter 8-39 LO 7  Prepare a bank reconciliation Use of a Bank Use of a Bank Review Question The reconciling item in a bank reconciliation that will result in an  adjusting entry by the depositor is: a. outstanding checks b. deposit in transit c. a bank error d. bank service charges Chapter 8-40 LO 7  Prepare a bank reconciliation Use of a Bank Use of a Bank Review Question 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 Cash c Cash is listed first in the current assets section d Restricted cash funds cannot be reported as a current asset Chapter 8-41 LO 7  Prepare a bank reconciliation Recording Process Recording Process Discussion Question Q8­20. 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 Chapter 8-42 LO 7  Prepare a bank reconciliation Reporting Cash Reporting Cash Most liquid asset, listed first in current assets section of balance  sheet Illustration 8­16 Cash equivalents Restricted cash Compensating balances Chapter 8-43 LO 8  Explain the reporting of cash Copyright Copyright “Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or  translation of this work beyond that permitted in Section 117 of the 1976 United  States Copyright Act without the express written permission of the copyright owner  is unlawful. Request for further information should be addressed to the Permissions  Department, John Wiley & Sons, Inc. The purchaser may make back­up copies for  his/her own use only and not for distribution or resale. The Publisher assumes no  responsibility for errors, omissions, or damages, caused by the use of these programs  or from the use of the information contained herein.” Chapter 8-44 ... Explain the reporting of? ?cash Chapter 8-3 Internal? ?Control? ?and? ?Cash Internal? ?Control? ?and? ?Cash Internal Internal Control Control Cash Cash Controls Controls The SarbanesOxley Act Principles Control over cash receipts.. .CHAPTER? ? INTERNAL CONTROL AND CASH Accounting? ?Principles,   Eighth Edition Chapter 8-2 Study Objectives Study Objectives Define? ?internal? ?control Identify the? ?principles? ?of? ?internal? ?control... Different individuals receive  cash,  record? ?cash? ?receipts,? ?and? ? hold the? ?cash Store? ?cash? ?in safes? ?and? ?bank  vaults; limit access to  storage areas; use? ?cash? ? registers Bond personnel who handle  cash;  require employees to take 

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