Chapter_7 - Sarbanes-Oxley, Internal Control, and Cash...

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Unformatted text preview: Sarbanes-Oxley, Internal Control, and Cash Chapter 7 1 Sarbanes-Oxley Act of 2002 page 1 Federal law enacted as a result of accounting scandals (i.e., Enron, WorldCom, Tyco, Adelphia Communications) in the early 2000's Applicable only to publicly-held companies The purpose was to restore the public's confidence in published financial statements 2 Sarbanes-Oxley Act of 2002 page 2 Emphasizes the importance of internal controls Requires companies to maintain strong and effective controls Also requires those companies and their auditor to report on the effectiveness of those controls 3 Internal Controls Policies, procedures, and processes used by a company to safeguard its assets, provide accurate financial statements, and ensure compliance with applicable laws and regulations 4 Elements of Internal Control page 1 Control Environment the overall attitude of management and employees about the importance of controls Risk Assessment identifying risks, evaluating their significance and likelihood of occurrence and determining controls to mitigate them (if necessary) 5 Elements of Internal Control page 2 Control Procedures Competent personnel, rotating duties, mandatory vacations Segregation of duties among personnel Proofs & security measures 6 Elements of Internal Control page 3 Monitoring effectiveness and adapting as necessary 7 Accounting for Cash Currency, coins, checks, money orders, etc. Most easily misappropriated asset Therefore, internal controls are especially needed 8 Bank Accounts An important control over cash: Reduces the amount of cash on hand at any one time Bank statements are provide an independent listing of a companies cash transactions 9 Bank Reconciliation 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 general ledger. Determines the "adjusted" or correct cash balance to be reported on the balance sheet. An adjusting journal entry is normally required as a result of the bank reconciliation An important internal control over cash 10 Investment Accounts Used to invest "excess" cash to earn additional revenue (i.e., interest and dividends) 11 Petty-Cash Funds Since it is inconvenient to pay small items by check, most business maintain a petty-cash fund for the payment of small expenses or purchases that occur frequently. 12 Internal Controls of PettyCash Funds Imprest balance Custody of fund is vested in only a few employees Funds are retained in a locked box or safe Periodic replenishment is accompanied by a journal entry 13 ...
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