Accounting Internal Control

Accounting Internal Control

Internal Control and Cash


Internal Control– organizational plan and all the related measures that are designed to safeguard assets, encourages employees to follow company policies, promote operational efficiencies, ensure accurate and reliable accounting records.


Safeguard assets– protecting its assets


Encourage employees to follow the company policies– allows results to be measured effectively


Promote operational efficiency– not wasting resources and being as efficient as possible


Accounting Internal Control

Accounting Internal Control

Ensure accurate and reliable accounting records- allows managers to know what branches are profitable and what needs improvement



Sarbanes Oxley Act

  1. companies must issue an internal control report which describes its responsibility and ability in internal controls in financial reporting.
  2. Created PCAOB to oversee auditors
  3. Firms are not allowed to audit and perform consulting services to the same company
  4. 25 years in prison for securities fraud and 20 years for making false sworn statements



Components of Internal Control



Monitoring of Controls– Internal auditors are hired to make sure employees are following company policy and running efficiently. External auditors may also be hired from the outside

Information System– There must be decision makers and those that approve transactions and some information must be limited access

Control Procedures– designed to make sure a business’s goals are met

Control Environment– those at the top and all the way down must perform properly

Risk Assessment – Must examine the risks including safety and financial and adapt company policy to meet those risks








Internal Control Procedures


Competent, Reliable and Ethical Employees

Treasurer- person in charge of writing checks

Controller- chief accounting officer


Separation of Duties:

  1. Separate operations from accounting: prevents conflict of interest
  2. Separate the custody of assets from accounting: Accountants must not handle cash and cashiers should not access accounting records. Treasurer should handle cash




Documents– all should be kept and organized and numbered


Electronic Devices– LP devices to prevent theft and maintain inventory integrity


Other Controls– Fireproof vaults for documents, alarms, los prevention employees



Internal Controls for E-Commerce


Stolen account numbers or passwords

Viruses and Trojans



Security Measures: Encryption and Firewalls


Limitations of Internal Controls:


Collusion- two or more people working together

Should measure cost and benefits


The Bank Account as a Control Device

Banks have controls such as signature card

Deposit Ticket


Bank Statements



Bank Reconciliation

2 records of a company’s cash

  1. 1.      Cash account in the company’s ledger
  2. 2.      Bank statement, which shows cash receipts and payments that went through the bank



Timing Differences- occur due to time lag in recording transactions


Preparing the Bank Reconciliation


Bank Side:

  1. Deposits in transit- outstanding deposits. The deposits that have been recorded and have already been added to the book balance, but the bank has not recorded them yet.  They have not cleared the bank yet.  Show up as “Add deposits in transit”
  2. Outstanding Checks-  checks that have been wrote but have not cleared the bank yet. Shown as “Less outstanding checks”
  3. Bank errors


Book Side

  1. Bank Collections- cash receipts the bank receives and records to the company account, but has not recorded to its books. Example is a lock-box system: where a business has a customer pay directly to its bank. Bank collection is “Add bank collections”
  2. Electronic Fund Transfers- “Add EFT” for receipts not yet added and “Less EFT” for payments not yet deducted from company’s books
  3. Service Charge- fee for processing a transaction. “Less service charges” Represents a cash payment not yet subtracted from a company’s cash
  4. Interest Revenue on checking account- “Add interest revenue”
  5. Nonsufficient Funds Checks- bad checks “Less NSF Checks”
  6. Cost of Printed Checks- handled like service charge
  7. Book Errors



Journalizing Transactions


Only book side gets journalized


Online Banking


Internal Control Over Cash Receipts

Comparing register’s cash inside to total receipts


Internal Control over Cash Payments

Purchase Order


Receiving Report


Voucher– document authorizing cash payment




Streamlined Procedures


Evaluated Receipts Settlement (ERS)-  compresses payment approval process into a single step: Compare the receiving report to the purchase order.


Electronic Data Interchange (EDI)- when inventory gets low it automatically reorders


Petty Cash Fund


Custodian of the petty cash fund

Petty Cash debit 200

Cash in bank credit 200


Imprest System-  requires that at all times the petty cash box contains the receipts that total the amount of the imprest balance( balance that must stay in petty cash)

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