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Week 7 Lecture Notes - Internal Control & Bank Reconciliation

Week 7 Lecture Notes - Internal Control & Bank Reconciliation

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1 THE UNIVERSITY OF NEW SOUTH WALES School of Accounting ACCT 1501: Accounting and Financial Management 1A Week 7 Internal Control & Bank Reconciliation Student Handout Contents: 1. Introduction 2. Tutorial questions Week 8 3. Lecture examples 4. Lecture slides Lecturer: Dr. Wei Chen School of Accounting UNSW [email protected] Blackboard: http://elearning.unsw.edu.au
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2 Week 7: Internal Control & Bank Reconciliation 1. Introduction In the first six weeks, we have given you an overview of the accounting cycle and introduced you to two key financial statements. This week’s lectures explore two major asset components of the balance sheet cash and receivables. The first half of the lecture briefly explores the role of accounting in creating strong internal controls. Internal control is fundamental to running a successful business. It can prevent fraud, minimise errors and provide a means of checking the accuracy and integrity of records. It is important to note that while we focus on ―cash‖ in our discussion of internal control, good internal control is not limited to protecting ―cash‖ . What else do we need internal control over? We concentrate on cash for two reasons: 1. Cash is the most liquid of assets, and hence one where the consequences of internal control failure can be quite high. 2. Cash gives us an opportunity to consider many different types of internal control mechanisms. We introduce two management and control mechanisms Petty Cash and the Bank Reconciliation. Petty Cash is a way to deal with small amounts of cash outside the main accounting system. This requires a reduced set of controls; some controls are removed, but petty cash is managed in such a way as to minimise the potential impact of any lacking controls.
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3 The second issue we look at in relation to cash is the reconciliation process. The accounts have one set of information, while bank records have slightly different information. We consider why this may be so, and how we can adjust for this fact in such a way that still enables us to maintain some controls over cash and its recording. It is important to note that the reconciliation process doesn’t only apply to cash. It is used in any circumstances where we have information asymmetry between external records and our internal records. So, for example, we might regularly reconcile supplier statements of account. In the second half of the lecture, we consider receivables. Why do we hold receivables? What are the risks and benefits? The accounting implications to consider are: (1) what to do when a customer doesn’t pay, and (2) how to provide additional information to give financial statement users relevant information about Accounts Receivable. Learning objectives At the end of this topic, you should be able to: 1. Understand and describe the importance and function of an internal control system 2. Describe the reasons for strong internal controls over cash 3. Understand the need for and how to maintain a petty cash fund 4. Complete a bank reconciliation 5.
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