hapter 8 Sarbanes-Oxley, Internal Control, and Cash -...

Chapter 8
Sarbanes-Oxley, Internal Control, and Cash
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In recent years, things have occurred that have resulted in increased emphasis on proper financial
reporting and on ensuring controls are in place to accomplish this. Chapter 8 introduces background on
the Sarbanes-Oxley Act of 2002, which has significantly increased the outside demand for assuring
proper financial reporting. The chapter also addresses the development of internal control frameworks for
a business and the financial accounting practices relating to recording cash transactions. Cash is
highlighted in this chapter because it is the asset most vulnerable to manipulation.
After studying the 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.
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.
7. Describe and illustrate the reporting of cash and cash equivalents in the financial statements.
Describe the Sarbanes-Oxley Act of 2002 and its impact on internal controls and financial
reporting.
KEY TERMS
Internal Control Sarbanes-Oxley Act of 2002
Chapter 8 discusses Sarbanes-Oxley Act of 2002 (the most important law affecting publicly held
companies in recent history). Although the law applies to only publicly traded companies, it really has
become the standard for assessing the financial controls and reporting of all companies. In essence, it
emphasizes the importance of effective internal control. Internal control procedures and processes have
been greatly emphasized and increased under Section 404 requirements. The Committee of Sponsoring
Organizations (COSO) is the widely accepted standard by which companies design, analyze, and evaluate
internal controls.
KEY TERMS:
Objectives of Internal Control
Elements of Internal Control
Three objectives of internal control are: (1) assets are safeguarded and used for business
purposes, (2) business information is accurate, and (3) employees comply with laws and
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regulations. The five elements of internal control are: (1) the control environment, (2) risk
assessment, (3) control procedures, (4) monitoring, and (5) information and communication.
The control environment element can be illustrated by the following example: In a poor control
environment, you have a dominating management staff that pressures employees to meet budgets
and projections at all costs, regardless of circumstances. A good control environment is
established by a management that encourages employees to adhere to control policies and
procedures and an employee code of conduct.