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hapter 8 Sarbanes-Oxley, Internal Control, and Cash

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

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Chapter 8 Sarbanes-Oxley, Internal Control, and Cash ______________________________________________ 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 185
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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.
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