22107 Lecture Notes - Lecture 5: Kilogram, Financial Statement, Internal Control
Lecture 5 (19th April)
Internal Control & Cash
LO1 Internal Control
Describe the role of internal control in a business
"For any business to be successful, there needs to be a system to make sure assets do not 'walk'
out the door, managements instructions are carried out and the accounting records reflect all
transactions that occurred and only those transactions."
Internal Control: company-wise process that seeks to improve a company’s operations and
its financial reporting. (helps a company protect its assets)
Is the system of policies & procedures that a company puts in place to provide reasonable
assurance that:
▫ Company's operations are effective & efficient
▫ Company’s financial reporting is reliable;
▫ Company is complying with applicable laws & regulations
LO2 Components of Internal Control
1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information & Communication
5. Monitoring
Internal Control Limitations
− Regardless of how well IC is designed within an organisation, it can provide only
reasonable assurance that a company is meeting its objectives.
− IC systems are limited in their effectiveness due to:
▫ (1) the human element;
▫ (2) cost-benefit analysis
LO3 Control over Cash
Understand two methods of internal control over cash – bank reconciliations & petty cash
funds.
"Cash is usually the most vulnerable asset. While diamonds worth more per kilogram, most of us
would not know where or how to sell diamonds – but we all know how to use cash!"
Cash Controls
Since cash is a highly desired asset and easily concealed, taken, and converted into other
assets with only a small chance of detection, two key cash controls include:
▫ Bank Reconciliations
▫ Petty cash funds
Bank Reconciliation
− Reconcile the bank balance (from the 'bank statement') to the actual cash balance
− Reconcile the company's book balance to the actual cash balance
− Adjust the company's book balance to the actual cash balance
Terms associated with BR:
▫ Credit Memorandum: an addition to the cash balance on the bank statement for items
such as the collection of interest.
▫ Debit Memorandum: a subtraction from the cash balance on the bank statement for
items such a service charges (bank fees).
▫ Deposit in transit: a deposit that has been made by the company but has not cleared the
bank as of the statement date.
▫ Outstanding cheque: a cheque that has been distributed by the company but has not
cleared the bank as of the statement date.
▫ Dishonored cheque: a cheque that has been banked but there were insufficient funds in
the drawer's account to pay (NSF = not sufficient funds") or a "bounced" cheque.
