ACCT1501 Lecture Notes - Lecture 4: Petty Cash, Bank Reconciliation, Internal Control
ACCT1501 Kristy
Chapter 7: Internal Control and Cash
Internal Control
- Increase efficiency and effectiveness of operations, reduce risk of asset loss, help ensure reliability of
financial statements and help ensure compliance w laws and regulations
- Process effected by an entity’s BoD, mgmt., and other personnel, designed to provide REASONABLE
ASSURANCE regarding the achievement of OBJECTIVES in the following categories:
o Effectiveness and efficiency of operations (incl safeguarding resources against loss)
o Reliability of internal and external financial and non-financial reporting (separate record keeping and
people who physically handle the assets)
o Compliance w applicable laws and regulations
- Limitations: reasonable assurance: human judgement, mgmt. override effective IC systems (computer fraud),
collusion between 2+ Indiv result in ctrl failures, cost-benefit
To effectively ctrl reliability of financial reporting:
- Control environment: policies and procedures (written+unwritten e.g. ethical values and competence of
entity’s people, mgmt. philosophy and operating style, way mgmt. assigns authority/responsibility,
organises/develops its people, attn.+direction provided by BoD)
- Risk assessment: identify and analyse sources of risk (objectives, eco/industry/reg/op conditions)
- Control activities: preventative, detective in nature- manual/automated (e.g. approvals, authorisations,
verifications, reconciliations, internal reviews, security of assets, segregation of duties)
o Top level reviews (performance compared to forecasts/prior period results)
o Information processing: accuracy, completeness, correct authorisation of transactions
o Separate record keeping from handling assets
o Physically protect sensitive assets
- Information and communication: internal/external events/stakeholders- timely, flow, feedback
- Monitoring: ongoing monitoring, separate evaluations
Internal control of Cash
- Liquid, anonymous
- Separation of duties for: recording and handling cash, receiving and paying cash
- All cash receipts banked in entirety daily
- All paym (except petty cash) made by EFT
- Authorised supporting documentation for paym
- Cheques/EFT countersigned (2 sig)
- Pay on original invoice and stamp ‘paid’
- Physical safeguards over cash- locked petty cash box, close cash drawer
- Reconcile bank accounts regularly- monthly
Bank reconciliations
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ACCT1501 Kristy
- Compares cash balance in bank statement w cash account in general ledger- timing differences (recorded in
ledger before bank and recorded in bank before ledger, errors)
- DR expense, CR cash at bank
- petty cash fund: handle small cash payments (DR petty cash, CR cash)
o disbursements from the fund, replenishing the fund
o Explains the difference between 2 sources of info of cash
Bank reconciliation statement:
1. check records against bank statement
2. items on our statements (timing)
3. items in bank statement (adjusting journal entry)- tick off appear on both
4. after reconciliation- general journal entries prepared for adjustments made to co records
- from co perspective- cash rep asset ie debit balance whereas from bank perspec liability cr
- interest revenue: DR cash CR investment
- service change: DR service charge, CR cash
Disclosure of internal control in annual reports
- procedures for identifying business and operational risks and controlling their financial impact on the Group
and the operational effectiveness of the policies and procedures related to risk and control
- budgeting and forecasting systems, financial reporting systems and controls
- policies and practices put in place by CEO for detecting, reporting and preventing fraud and serious breaches
of business conduct and whistle-blowing procedures
- procedures for ensuring compliance with relevant regulatory and legal requirements
- arrangements for protecting intellectual property and other non-physical assets
- operational effectiveness of the business RAC structures
- overseeing the adequacy of the internal controls and allocation of responsibilities for monitoring financial
controls
Tutorial
- safeguard (misuse of assets), reliability, compliance (laws)
- components: control environment, risk assessment, control activities, info and comms, monitoring
- features: tone from the top and HR, separation of duties, physical protection of sensitive assets
- limitations: reasonable (not abs) assurance, genuine mistakes, mgmt. override, collusion among employees,
computer fraud, cost vs benefit
Chapter 8: Accounts Receivable and further record-keeping
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Increase efficiency and effectiveness of operations, reduce risk of asset loss, help ensure reliability of financial statements and help ensure compliance w laws and regulations. Process effected by an entity"s bod, mgmt. , and other personnel, designed to provide reasonable. Limitations: reasonable assurance: human judgement, mgmt. override effective ic systems (computer fraud), collusion between 2+ indiv result in ctrl failures, cost-benefit. Control environment: policies and procedures (written+unwritten e. g. ethical values and competence of entity"s people, mgmt. philosophy and operating style, way mgmt. assigns authority/responsibility, organises/develops its people, attn. +direction provided by bod) Risk assessment: identify and analyse sources of risk (objectives, eco/industry/reg/op conditions) Control activities: preventative, detective in nature- manual/automated (e. g. approvals, authorisations, verifications, reconciliations, internal reviews, security of assets, segregation of duties) Information processing: accuracy, completeness, correct authorisation of transactions: top level reviews (performance compared to forecasts/prior period results, separate record keeping from handling assets, physically protect sensitive assets. Information and communication: internal/external events/stakeholders- timely, flow, feedback.
