ch07 - Chapter 7 Internal Control and Cash Study Objectives...

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Chapter 7 Internal Control and Cash Study Objectives 1. Identify the principles of internal control. 2. Explain the applications of internal control to cash receipts. 3. Explain the applications of internal control to cash disbursements. 4. Prepare a bank reconciliation. 5. Explain the reporting of cash. 6. Discuss the basic principles of cash management. 7. Identify the primary elements of a cash budget. 8. (Appendix) Explain the operation of a petty cash fund. Study Objective 1 - Identify the Principles of Internal Control Internal control consists of all of the related methods and measures adopted within a business to: Safeguard assets from employee theft, robbery, and unauthorized use. Enhance the accuracy and reliability of its accounting records by reducing the risk of errors (unintentional mistakes) and irregularities (intentional mistakes and misrepresentations) in the accounting process. Sarbanes-Oxley Act of 2002 (SOX) requires all publicly traded U.S. corporations to maintain an adequate system of internal controls. SOX imposes more responsibilities on corporate executives and boards of directors to ensure that companies’ internal controls are reliable and effective Companies must develop sound principles of control over financial reporting and continually assess that the controls are working. Independent outside auditors must attest to the level of internal controls. To safeguard assets and enhance the accuracy and reliability of its accounting records, companies follow internal control principles . The following six internal control principles apply to most enterprises : 1. Establishment of Responsibility 7-1
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An essential characteristic of internal control is the assignment of responsibility to specific individuals. Control is most effective when only one person is responsible for a given task. Establishing responsibility includes the authorization and approval of transactions. 2. Segregation of Duties Segregation of duties is indispensable in a system of internal control. The rationale for segregation of duties is that the work of one employee should, without a duplication of effort, provide a reliable basis for evaluating the work of another employee. There are two common applications of this principle: 1. The responsibility for related activities should be assigned to different individuals. 2. The responsibility for record keeping for an asset should be separate from the physical custody of the asset. 3. Related Activities: When one individual is responsible for all of the related activities, the potential for errors and irregularities is increased. Related purchasing activities should be assigned to different individuals. Related purchasing activities include ordering merchandise, receiving goods, and paying (or authorizing payment) for merchandise.
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