Click To Edit Master Title Style: 8 Sarbanes-Oxley, Internal Control and Cash

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Sarbanes-
Oxley, Internal
Control and
Cash
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After studying this chapter, you should
be able to:
1. Describe the Sarbanes-Oxley Act of 2002 and its impact on
internal controls and financial reporting.
2. Describe and illustrate the objectives and elements

of internal control.
3. Describe and illustrate the application of internal
controls to cash.
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be able to:
4. Describe the nature of a bank account and its use in controlling
cash.
5. Describe and illustrate the use of a bank

reconciliation in controlling cash.
6. Describe the accounting for special-purpose cash
funds.
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be able to:
7. Describe and illustrate the reporting of cash and cash
equivalents in the financial statements.
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8-1
Objective
Objective 11
Describe the Sarbanes-Oxley
Act of 2002 and its impact on
internal controls and
financial reporting.
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8-1
The Sarbanes-Oxley Act of 2002
(referred to simply as Sarbanes-
Oxley) applies only to companies
whose stock is traded on public
exchanges. Its purpose is to restore
public confidence and trust in the
financial statements of companies.
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8-1
Sarbanes-Oxley requires
companies to maintain
strong and effective
internal control.
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8-1
Internal control is broadly
defined as the procedures and
processes used by a company to
safeguard its assets, process
information accurately, and
ensure compliance with laws
and regulations.
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8-1
Effect of Sarbanes-Oxley Act
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8-1
As a company that listed on the New York Stock
Exchange, Telkom is obliged to comply with all existing
rules, including the Sarbanes Oxley Act (SOA). The SOA
requires internal control over the financing reporting and
guarantee from Telkoms management that all
information in the financial report is accurate and can be
accounted for. To meet the SOA requirement, Telkom has
conducted internal improvement through organizational
transformation and the application of Good Corporate
Governance (GCG) policies. The internal control over the
financing reporting has become the priority for improving
the system. 10
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8-2
Objective
Objective 22
Describe and illustrate the
objectives and elements of
internal control.
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8-2
Objectives of Internal Control
To provide reasonable assurance that:

1) assets are safeguarded and used for
business purposes,
2) business information is accurate, and
3) employees comply with laws and
regulations.
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8-2
Employee fraud is the

intentional act of
deceiving an employer
for personal gain.
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8-2
Five Elements of Internal Control
Management is responsible for designing and

applying five elements of internal control to
meet the three internal control objectives.
These elements are
1) the control environment,
2) risk assessment,
3) control procedures,
4) monitoring, and
5) information and communication.
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8-2
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8-2
Control Environment
A businesss control
environment is the overall
attitude of management and
employees about the
importance of controls.
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8-2
Factors That Influence the Control
Environment
Managements philosophy and

operating style
The businesss organizational
structure
Personnel policies
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8-2
Control Environment
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8-2
Example of control procedures for an all-
night convenience store:
Locate the cash register near the door, so that
it is fully visible from outside the store; have
two employees work late hours; employ a
security guard.
Deposit cash in the bank daily, before 5 p.m.
(Continued)
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8-2
Keep only small amounts of cash on hand
after 5 p.m. by depositing excess cash in a
store safe that cant be opened by
employees on duty.
Install cameras and alarm systems.
(Concluded)
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8-2
Indicators of Internal
Control Problems
Warning Signs With Regard to People

1. Abrupt change in lifestyle.
2. Close social relationships with suppliers.
3. Refusing to take a vacation.
4. Frequent borrowing from other
employees.
5. Excessive use of alcohol or drugs.
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8-2
Indicators of Internal
Control Problems
Warning Signs from the
Accounting System
1. Missing documents or gaps in transaction
numbers.
2. An unusual increase in customer refunds.
3. Differences between daily cash receipts
and bank deposits.
4. Sudden increase in slow payments.
5. Backlog in recording transactions.
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8-2
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Example Exercise 8-1
Identify each of the following as relating to (a)

the control environment, (b) risk assessment, or
(c) control procedures.
1. Mandatory vacations
2. Personnel policies
3. Report of outside consultants on
future market changes
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8-2
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Follow My Example 8-1
Master title style
1. (c) control procedures

2. (a) the control environment
3. (b) risk assessment
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For Practice: PE 8-1A, PE 8-1B
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8-3
Objective
Objective 33
Describe and illustrate the
application of internal
controls to cash.
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8-3
Control of Cash Receipts
One of the most important

controls to protect cash
received in over-the-counter
sales is a cash register.
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8-3
Change Fund
A predetermined amount of
money that is given to each cash
register clerk in a cash drawer is
called a change fund.
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8-3
Cash Short and Over
Cash sales for March 19 totaled Rp3,150,000

per the cash register tape. After removing the
change fund, only Rp3,142,000 was on hand.
Mar 19 Cash 3 142 000

Cash Short and Over 8 000
Sales 3 150 000
To record cash sales and
actual cash on hand.
Note that the shortage was debited to Cash

Short and Over. 28
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8-3
Control of Cash Receipts
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8-3
Electronic Funds Transfers
Cash may be received from

customers through electronic
funds transfers. Customers may
authorize automatic electronic
transfers from their checking
accounts to pay monthly bills.
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8-3
Voucher System
A voucher system is a set of

procedures for authorizing and
recording liabilities and cash
payments. It may be either
manual or computerized.
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8-3
A voucher is any document

that serves as proof of
authority to pay cash or issue
an electronic funds transfer.
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8-4
Objective
Objective 44
Describe the nature of a bank
account and its use in
controlling cash.
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8-4
Use of Bank Accounts
A major reason that

businesses use bank accounts
is for control purposes.
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8-4
Bank accounts provide an

independent recording of cash
transactions that can be used as a
verification of the businesss
recording of transactions.
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8-4
Bank Statement
A summary received from

the bank of all checking
account transaction is called
a bank statement.
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8-4
Bank Statement
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(Continued)
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8-4
Bank Statement
(Concluded) 38
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8-4
Typical credit or debit memorandum
entries found on the bank statement:
EC Error correction to correct bank
error.
NSF Not sufficient funds check.
SC Service charge.
ACH Automated Clearing House entry
for electronic funds transfer.
MS Miscellaneous items.
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8-4
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The following items may appear on a bank statement:
(1) NSF check
(2) EFT Deposit
(3) Service Charge
(4) Bank correction of an error from recording a
Rp400,000 check as Rp40,000.
Indicate whether the item would appear as a debit or credit
memorandum on the bank statement and whether the item
would increase or decrease the balance of depositors
account.
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8-4
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Appears on the Increases or
Bank Statement Decreases the
as a Debit or Balance of the
Credit Depositors
Item No. Memorandum Bank Account
(1) Debit Memorandum Decreases
(2) Credit Memorandum Increases
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8-4
Power Networkings Records
and Bank Statement
Power Networking
should determine the
reason for difference in
these two amounts.
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8-5
Objective
Objective 55
Describe and illustrate the use
of a bank reconciliation in
controlling cash.
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8-5
A bank reconciliation is an analysis of

the items and amounts that cause the
cash balance reported in the bank
statement to differ from the balance of
the cash account in the ledger in order
to determine the adjusted cash balance.
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8-5
Banks records Companys records
Beginning balance Rp3,359,780 Beginning balance Rp2,549,990
Power Network prepares to reconcile

the monthly bank statement as of
July 31. The bank statement shows
an ending cash balance of
Rp3,359,780. The companys Cash
account has a July 31 balance of
Rp2,549,990. 45
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8-5
Add deposit not
recorded by bank 816,200
Rp4,175,980
A deposit of Rp816,200 did not 46

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appear on the bank statement.
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8-5
Add deposit not Add note and interest
recorded by bank 816.200 collected by bank 408,000
Rp4,175,980 Rp2,957,990
The bank collected a note in the amount of 47

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Rp400,000 and the related interest of Rp8,000 for
Power Networking
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8-5
recorded by bank 816.200 collected by bank 408,000
Rp4,175,980 Rp2,957,990
Deduct outstanding
checks:
No. 812 Rp1,061,000
No. 878 435,390
No. 883 48,600 1,544,990
Three checks that were written during the period did not 48
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appear on the bank statement: No. 812, Rp1,061,000;
No. 878, Rp435,390, No. 883, Rp48,600.
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8-5
recorded by bank 816,200 collected by bank 408,000
Rp4,175,980 Rp2,957,990
Deduct outstanding
checks: Deduct check
No. 812 Rp1,061,000 NSF Rp300,000
No. 878 435,390
No. 883 48,600 1,544,990
The bank returned a check for Rp300,000 from 49

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customer (Thomas Tarigan) because of insufficient
funds (NSF).
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8-5
Rp4,175,980 Rp2,957,990
Deduct outstanding
No. 812 Rp1,061,000 NSF Rp300,000
No. 878 435,390 Bank service
No. 883 48,600 1,544,990 charges 18,000
The bank service charges totaled Rp18,000. 50

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8-5
Rp4,175,980 Rp2,957,990
Deduct outstanding
No. 812 Rp1,061,000 NSF Rp300,000
No. 883 48,600 1,544,990 charges 18,000
Error recording
Check No. 879 9,000
327,000
Check No. 879 for Rp732,260 to CV Tunggal Jaya on 51 51
account, erroneously recorded in journal as Rp723,260.
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8-5
Rp4,175,980 Rp2,957,990
Deduct outstanding
No. 812 Rp1,061,000 NSF Rp300,000
No. 883 48,600 1,544,990 charges 18,000
Error recording
Check No. 879 9,000 327,000
Adjusted balance Rp2,630,990 Adjusted balance Rp2,630,990
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8-5
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8-5
Journal entries must be

prepared for those items that
affected the companys
(depositors) side of the
reconciliation.
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8-5
Companys records
Beginning balance Rp2,549,990
Add note and interest
collected by bank 408,000
Rp2,957,990
Deduct check
NSF Rp300,000
Bank service
charges 18,000
Error recording
Check No. 879 9,000 327,000
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8-5
Entry to Record Plus Items
July 31 Cash 408 000

Notes Receivable
400 000
NoteIncome
Interest collected by bank.
8 000
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8-5
Companys records
Beginning balance Rp2,549,990
Add note and interest
collected by bank 408,000
Rp2,957,990
Deduct check
NSF Rp300,000
Bank service
charges 18,000
Error recording
Check No. 879 9,000 327,000
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8-5
Entry to Record Minus Items
July 31 Cash 408 000

Notes Receivable
400 000
Note
Interest collected by bank.
Income
8 000
31 Accounts Receivable Thomas Tarigan 300 000
Miscellaneous Expense 18 000
Accounts Payable CV Tunggal Jaya 9 000
Cash 327 000
NSF check, bank service
charges, and error in
recording Check no. 879.
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8-5

The following data were gathered to use in reconciling

the bank account of Depok Photo Studio
Balance per bank Rp14,500,000
Balance per company records 13,875,000
Bank service charges 75,000
Deposit in transit 3,750,000
NSF check 800,000
Outstanding checks 5,250,000
(Continued) 58
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8-5

a. What is the adjusted balance on the bank

reconciliation?
b. Journalize any necessary entries for Depok
Photo Studio based upon the bank
reconciliation.
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8-5

a. Rp13,000,000 as shown below.

Bank section of reconciliation: Rp14,500,000
Rp5,250,000 + Rp3,750,000 = Rp13,000,000
Company section of reconciliation: Rp13,875,000
Rp75,000 Rp800,000 = Rp13,000,000
b. Accounts Receivable 800,000
Miscellaneous Expense 75,000
Cash 875,000
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8-6
Objective
Objective 66
Describe the
accounting for special-
purpose cash funds.
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8-6
It is usually not practical for a
business to write checks to pay
small amounts. Thus, it is
desirable to control such
payments by using a special cash
fund, called a petty cash fund.
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On August 1, issued Check No. 511 for
Rp500,000 to established a petty cash fund.
JOURNAL Page 9
Post.
Date Description Debit Credit
Ref.
2008
Aug. 1 Petty Cash 500 000
Cash 500 000
Established petty cash
fund issuing Check 511.
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8-6
At the end of August, the petty cash receipts indicated
expenditures for the following items: office supplies, Rp380,000,
postage (office supplies), Rp22,000; store supplies, Rp35,000,
and miscellaneous administrative items, Rp30,000.
Aug. 31 Office Supplies 402 000

Store Supplies 35 000
Miscellaneous Administrative Exp. 30 000
Cash 467 000
Replenished petty cash fund.
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8-6
Replenishing the petty cash fund

restores it to its original amount
of Rp500,000. Note that there is
no entry to Petty Cash when the
fund is replenished.
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8-6
Businesses often use special

cash funds to meet other needs,
such as payroll. Such funds are
called special-purpose funds.
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8-6
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Prepare journal entries for each of the following;
a) Issued check to establish a petty cash fund of
Rp500,000.
b) The amount of cash in the petty cash fund is
currently Rp120,000. Issued a check to replenish the
fund, based on the following summary of petty cash
receipts: office supplies, Rp300,000 and
miscellaneous administrative expense, Rp75,000.
Record any missing funds in the cash short and over
account. 67
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8-6

a) Petty Cash 500,000

Cash 500,000
b) Office Supplies 300,000

Miscellaneous Admin. Expense 75,000
Cash Short and Over 5,000
Cash 380,000
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8-7
Objective
Objective 77
Describe and illustrate
the reporting of cash and
cash equivalents in the
financial statements.
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8-7
A companys excess cash is

normally invested in highly liquid
investments. These investments
are called cash equivalents.
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8-7
Companies that have
invested excess cash in
cash equivalents usually
report cash and cash
equivalents as one amount
on the balance sheet.
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8-7
Banks may require depositors to

maintain minimum cash
balances in their bank accounts.
Such a balance is called a
compensating balance.
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8-7
Ratio of Cash to Monthly
Cash Expenses
A cash ratio that is especially useful for

companies, starting up or in financial
distress, is the ratio of cash to monthly
cash expenses. First, the monthly cash
expenses are determined.
Negative Cash Flows
from Operations
Monthly Cash Expenses =
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8-7
Cash Expenses
The ratio of cash to monthly

cash expenses can then be
computed as follows:
Cash and Cash Equivalent
Ratio of Cash to Monthly as of Year-End
Cash Expenses = Monthly Cash Expenses
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8-7
Cash Expenses
Northwest Airlines Corporation reported the following

data (in millions) at the end of 2005:
Negative cash flows from operations
Rp(436,000)
Cash and cash
Monthly Cashequivalents, Dec. 31, 2005
Rp436,000
= = Rp36,300 per mo.
Expense 12
1,284,000
Monthly cash expense is sometimes
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referred to as cash burn.
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8-7
Cash Expenses
Ratio of Cash to
Rp1,284,000
Monthly Cash = = Rp35,400
Expenses Rp36,300
Interpretation: As of December 31, 2007,

Northwest would run out of cash in less than
three years months unless it changes it
operations, sells investments, or raises
additional funds.
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1

Click to edit Master title style 8

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2. Describe and illustrate the objectives and elements

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5. Describe and illustrate the use of a bank

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To provide reasonable assurance that:

Employee fraud is the

Management is responsible for designing and

Managements philosophy and

Warning Signs With Regard to People

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Identify each of the following as relating to (a)

1. (c) control procedures

One of the most important

Cash sales for March 19 totaled Rp3,150,000

Mar 19 Cash 3 142 000

Note that the shortage was debited to Cash

Cash may be received from

A voucher system is a set of

A voucher is any document

A major reason that

Bank accounts provide an

A summary received from

A bank reconciliation is an analysis of

Power Network prepares to reconcile

A deposit of Rp816,200 did not 46

The bank collected a note in the amount of 47

The bank returned a check for Rp300,000 from 49

The bank service charges totaled Rp18,000. 50

Journal entries must be

July 31 Cash 408 000

July 31 Cash 408 000

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The following data were gathered to use in reconciling

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a. What is the adjusted balance on the bank

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a. Rp13,000,000 as shown below.

Aug. 31 Office Supplies 402 000

Replenishing the petty cash fund

Businesses often use special

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a) Petty Cash 500,000

b) Office Supplies 300,000

A companys excess cash is

Banks may require depositors to

A cash ratio that is especially useful for

The ratio of cash to monthly

Northwest Airlines Corporation reported the following

Interpretation: As of December 31, 2007,

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