Financial

Accounting:1
Tools for Business DecisionMaking
Fifth Canadian Edition

Prepared By:
Debbie Musil
Kwantlen Polytechnic
University

Copyright John Wiley & Sons Canada, Ltd.

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C H APT ER
2

Internal Control and1

Cash
Study Objectives

1.

Explain the activities that help achieve internal control and

prevent fraud.

2.

Apply control activities to cash receipts and payments.

3.

Prepare a bank reconciliation.

4.

Explain the reporting and management of cash.

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Fraud
1
An intentional act to misappropriate (steal)
assets or to misstate financial statements
Many high-profile collapses of companies
due to fraud

Examples of misstatements:
Recording expenses as assets
Overstating useful lives of assets

Recording revenues that do not exist

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Internal Control
1
The related methods and measures adopted
within a company to help it achieve:
Reliable financial reporting
Effective and efficient operations

Compliance with relevant laws and regulations

The most effective way to prevent fraud

Also can help prevent errors, which cause
unintentional misstatements

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Internal Control (Continued)

1
Good internal control systems have five
primary components:
Control environment
Risk assessment

Control activities
Information and communication
Monitoring

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Control Activities
1

Control activities include:

Authorization of transactions and activities
Segregation of duties
Documentation
Physical controls
Independent checks of performance
Human resource controls

Specific control activities used by a company

will depend on:
The risks it is facing
The size and nature of the company
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Discussion Question
1
What are some examples of control activities a
movie theatre might have?

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Limitations of Internal Control

1
Can only provide reasonable assurance
that assets are safeguarded and records are
reliable
Limitations include:
Cost / benefit
Human element
Collusion

Size of business

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Cash Controls
1
Cash is highly susceptible to theft

What is cash?
Coins, currency, cheques, money orders
Money on hand or in bank
Debit card and bank credit card transactions
(but not non-bank credit card transactions)

General rule: if bank will accept for deposit,

it is considered cash

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Cash Receipts
1
Over-the-counter, mail-in and electronic
(EFT) receipts
Internal control over cash receipts is more
effective when cash receipts are deposited
into the bank account daily or are made by
electronic funds transfer
Other examples of control activities over
cash receipts?

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Cash Payments
1

Control activities over cash payments are

more effective when payments are made by
cheque or by electronic funds transfer, rather
than in cash
Good controls include:
Dual signatures on cheques
Segregation of duties
Use prenumbered cheques and account for
numerical continuity
Pay electronically instead of by cheque

Other examples of control activities over cash

payments?
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Use of a Bank
1
Safeguards cash by using a bank as a
depository and clearinghouse for cheques
received and written
Minimizes amount of cash that must be
kept on hand
Provides a double record of transactions
One by the business

One by the bank

These two accounts can be reconciled

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CHAPTER

Understanding Debits and Credits

13

Books
(Cash is an
Asset)

Cheque

Bank
(Your Cash
Account is a
Liability)
Debit (decrease)

Deposit

Credit (increase)

Debit (increase)

Credit
(decrease)

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Differences Between Company

Records and Bank Statement
1
Time lags
The period after a cheque is written and dated
but not yet presented to or paid by the bank
(outstanding cheques)
The period between receipts being recorded
by the company and receipts being recorded
by the bank (deposits in transit)
Time lags can also occur when the bank
records debit or credit memos

Errors by either party in recording

transactions
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Reconciling the Bank Account

1
This reconciles the balance per the
companys bank account with the cash
balance per the general ledger (books)
Makes them agree

Both the books and bank balance are

reconciled to their adjusted (correct) cash
balance
Adjusted cash balance = reconciled balance

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Bank Reconciliation Procedures

Illustration 7-5

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Bank Reconciliation Procedures

(Continued)
1
Reconciling items per bank:
Deposits in transit
Outstanding cheques
Bank errors

Reconciling items per books:

Credit memoranda and other deposits
Debit memoranda and other payments
Book errors
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Bank Reconciliation Procedures

(Continued)
1

Books

Each reconciling item in determining the

adjusted balance per books MUST be
journalized and posted

Bank
Do NOT journalize any entries on bank side

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CHAPTER

Discussion Question
1
Why is a bank reconciliation an important
part of a companys internal control over
cash?

19

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Reporting Cash
1
Cash is recorded in both the statement of
financial position and the statement of
cash flows
Statement of cash flows shows the sources and
uses of cash

Cash is the most liquid asset and is listed

first in the current assets section of the
statement of financial position
Can be combined with cash equivalents
Short-term highly liquid investments that are
subject to insignificant risk of changes in value
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Reporting Cash (Continued)

1
Cash equivalents
Reporting likely to change in the future from
cash and cash equivalents to short-term
investments

If cash is in a deficit or overdraft at yearend, it is reported as a current liability

called bank indebtedness
Cash that is restricted (not available for
general use) is reported separately as a noncurrent asset
Compensating balance is a form of restriction
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Managing Cash
Illustration 7-7

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Discussion Question
1
Do you use a cash budget? How does/can a
cash budget help you manage your cash?

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Comparing IFRS and ASPE

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Copyright Notice

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