Chapter 08

Chapter 08 - CASH AND INTERNAL CONTROLS Chapter 8 PURPOSE...

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CASH AND INTERNAL CONTROLS Chapter 8
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McGraw-Hill/Irwin Slide 2 PURPOSE OF INTERNAL CONTROL BBC NEWS 25 January, 2008 Jerome Kerviel, a 31-year-old trader with Societe Generale ( 法法法法 ), chalked up trading losses amounting to over €4.9 billion (HK$56 billion). How does a world-class bank like Societe Generale allow a 31-year old employee to flush €4.9 billion down the toilet without any alarm bells going off?
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McGraw-Hill/Irwin Slide 3 PURPOSE OF INTERNAL CONTROL Policies and procedures managers use to: Protect assets. Ensure reliable accounting. Promote efficient operations. Urge adherence to company policies.
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McGraw-Hill/Irwin Slide 4 PRINCIPLES OF INTERNAL CONTROL Internal control principles common to all companies: 1. Establish responsibilities. 2. Maintain adequate records. 3. Insure assets and bond key employees. 4. Separate recordkeeping from custody of assets. 5. Divide responsibility for related transactions. 6. Apply technological controls. 7. Perform regular and independent reviews.
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McGraw-Hill/Irwin Slide 5 LIMITATIONS OF INTERNAL CONTROL Human Error Negligence Fatigue Misjudgment Confusion Human Fraud Intent to defeat internal controls for personal gain
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McGraw-Hill/Irwin Slide 6 LIMITATIONS OF INTERNAL CONTROL The costs of internal controls must not exceed their benefits. The costs of internal controls must not exceed their benefits. Costs Benefits
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McGraw-Hill/Irwin Slide 7 CASH Coins and paper money Checks Money orders Travelers’ checks Bank credit card sales Cash is defined as any deposit banks will accept.
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McGraw-Hill/Irwin Slide 8 Combined with cash on balance sheet REPORTING CASH IN THE BALANCE SHEET Liquid short-term investments Stable market values Matures within 90 days of acquisition Cash Equivalents Examples: Money market funds Government treasury bills High-grade commercial paper
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McGraw-Hill/Irwin Slide 9 CONTROL OF CASH An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines: An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines: Handling cash is separated from recordkeeping for cash. Cash receipts are promptly deposited in a bank. Cash disbursements are made by check.
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McGraw-Hill/Irwin Slide 10 VOUCHER SYSTEM OF CONTROL A voucher system establishes procedures for: Verifying, approving and recording obligations for eventual cash disbursements.
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This note was uploaded on 03/12/2012 for the course BUSI 1002 taught by Professor Liu during the Winter '10 term at HKU.

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Chapter 08 - CASH AND INTERNAL CONTROLS Chapter 8 PURPOSE...

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