Chapter Eight - I nternal Control and Cash

Study Objectives - See Previous Page

Lesson One - I nternal Control

1. With students read Minding the Money in Moose Jaw on page 370.

2. Remind students that the control of cash does not need to be complicated, but it is
important. Similarly, controls are needed to safeguard other types of assets.
( ie. equipment, merchandise, supplies etc.)

3. Read with the students pages 372 and 373 to describe internal controls.

4. The Primary Objectives I nternal Control
1. Optimize the use of resources
2. Prevent and detect errors and irregularities.
3. Safeguard assets.
4. Maintain reliable control systems.

5. Students will record the principles of internal controls:

A) Authorization of Transactions and Activities
Transactions and activities must be undertaken, and approved, by appropriate
individuals or departments.
Responsibility should be assigned to specific individual.
Control is most effective when only one person is responsible for a given task.

B) Segregation of Duties
C) The work of one employee should, without a duplication of effort, provide a reliable
basis for evaluating work of another employee.
D) When one individual is responsible for all of the related activities , the potential for
errors and irregularities is increased.
E) When one employee keeps the records of an asset, and a different employee is the
custodian (keeps the asset itself).

C) Documentation Procedures
D) Documents should provide evidence that transactions and events have occurred.
E) Documents should be prepared when transactions occur.
F) Pre-numbering documents permits all documents in a related series to be sequentially
accounted. (Documents not omitted or counted twice)
G) Source documents should be promptly forwarded to the accounted department)


D) Safeguarding Assets and Records
E) Physical, mechanical, and electronic controls are needed to control access to and use
of , assets and records.
F) Physical controls relate to the safeguarding of assets (safes, bank vaults, fences and
locked warehouses).
G) Mechanical and electronic controls enhances accuracy and reliability of accounting
records (Cash registers, time clocks, security monitors).

E) I ndependent Verification
F) This involves the review, comparison and the reconciliation of data.
G) Maximum benefit is derived when this is done on a surprise basis; made by an
independent party and discrepancies reported to management.
H) Internal verification is useful when comparing records to existing assets.
I) External auditors also attest to the fairness of financial statement presentation in
accordance with G.A.A.P.

F) Other Controls
G) Bonding employees that handle cash.
H) Rotating employees duties.
I) Requiring employees to take vacations

5. Limitations of I nternal Controls
The cost of the control should not exceed their expected benefits.
Controls should recognize the human elements, such as, fatigue, carelessness,
indifference, and collusion.
The size of the business

6. Assign: BE8-2 (Page 400), E8-2 (Page 401)


Lesson Two - I nternal Control and Cash Receipts and Cash
Disbursements

1. Hand out Illustrations 8-2 and 8-3 Application of I nternal Controls of Cash Receipts
and Cash Disbursements.
Read and Discuss

2. Read with students, pages 379 to 382.


3. Handout Illustration 8-4 Petty Cash Fund
Read handout with the students explaining:
a) Petty Cash Fund Entries - Set up and Replenishing


b) Internal Control Features of the Petty Cash Fund.

4. Assign Reading: Pages 383 to 389
This should be review from the previous year.

5. Assign: E8-3 ,E8-4, E8-5 (Page 402)
Lesson Three - Reconciling the Bank Account

1. The bank and the depositor maintain independent records of the depositors chequing
account. If youve never had a chequing account you might assume that the respective accounts
balances will always agree.
The lack of agreements between to balances may be due to:

Time Lags
This may prevent one of the parties from recording the transaction in the same time
period as the other.
Errors
These may include lost cheques, and recording errors.

1. Reconciliation Procedures
To obtain maximum benefits from a bank reconciliation, it should be prepared by an
employee who has no other responsibilities related to cash.

3. Students will record the format for a Bank Reconciliation (I llustration 8-5)

4. Using Illustration 8-6 and 8-7, prepare a bank reconciliation and adjusting and
correcting entries with students.

5. Refer students to pages 392 and 393 for further examples.

6. Assign: E8-7 and E8-9 (Page 403)


Lesson Four - Reporting Cash

1. With Students read 394 to 396 then have the students take the following notes.

2. Cash on hand, cash in banks, and petty cash are combined and reported as Cash in the
financial statements. These amounts are also combined with temporary investments, sometimes
called cash equivalents. Restricted cash that will not be used in the next year is shown as
noncurrent cash.
Management must carefully balance their cash needs to ensure that sufficient cash is on
hand to meet daily needs, but that not too much cash is maintained unproductively.
The cash flow statement help determine how effective management is in controlling and
managing their cash.


3. Assign E8-12 (Page 404) and P8-9A (Page 410)









The Primary Objectives I nternal Control
1. Optimize the use of resources
2. Prevent and detect errors and irregularities.
3. Safeguard assets.
4. Maintain reliable control systems

The Principles of I nternal Controls

A) Authorization of Transactions and Activities
Transactions and activities must be undertaken, and approved, by appropriate
individuals or departments.
Responsibility should be assigned to specific individual.
Control is most effective when only one person is responsible for a given task.

B) Segregation of Duties
C) The work of one employee should, without a duplication of effort, provide a reliable
basis for evaluating work of another employee.
D) When one individual is responsible for all of the related activities , the potential for
errors and irregularities is increased.
E) When one employee keeps the records of an asset, and a different employee is the
custodian (keeps the asset itself).

C) Documentation Procedures
D) Documents should provide evidence that transactions and events have occurred.
E) Documents should be prepared when transactions occur.
F) Pre-numbering documents permits all documents in a related series to be sequentially
accounted. (Documents not omitted or counted twice)
G) Source documents should be promptly forwarded to the accounted department)

D) Safeguarding Assets and Records
E) Physical, mechanical, and electronic controls are needed to control access to and use
of , assets and records.
F) Physical controls relate to the safeguarding of assets (safes, bank vaults, fences and

locked warehouses).
G) Mechanical and electronic controls enhances accuracy and reliability of accounting
records (Cash registers, time clocks, security monitors).

E) I ndependent Verification
F) This involves the review, comparison and the reconciliation of data.
G) Maximum benefit is derived when this is done on a surprise basis; made by an
independent party and discrepancies reported to management.
H) Internal verification is useful when comparing records to existing assets.
I) External auditors also attest to the fairness of financial statement presentation in
accordance with G.A.A.P.

E) Other Controls
F) Bonding employees that handle cash.
G) Rotating employees duties.
H) Requiring employees to take vacations


Limitations of I nternal Controls
The cost of the control should not exceed their expected benefits.
Controls should recognize the human elements, such as, fatigue, carelessness,
indifference, and collusion.
The size of the business



Reconciling the Bank Account

The bank and the depositor maintain independent records of the depositors chequing
account.
If youve never had a chequing account you might assume that the respective accounts
balances will always agree.
The lack of agreements between to balances may be due to:


Time Lags
This may prevent one of the parties from recording the transaction in the same time
period as the other.
Errors
These may include lost cheques, and recording errors.

To obtain maximum benefits from a bank reconciliation, it should be prepared by an
employee who has no other responsibilities related to cash.


Reporting Cash

Cash on hand, cash in banks, and petty cash are combined and reported as Cash in the
financial statements.
These amounts are also combined with temporary investments, sometimes called cash
equivalents.
Restricted cash that will not be used in the next year is shown as noncurrent cash.
Management must carefully balance their cash needs to ensure that sufficient cash is on
hand to meet daily needs, but that not too much cash is maintained unproductively.
The cash flow statement help determine how effective management is in controlling and
managing their cash.