ACC 332 Chapter Notes - Chapter 7-1: Sarbanes–Oxley Act, Petty Cash, Internal Control
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LO7-1 Deﬁne what is meant by internal control and describe some key elements of an
internal control system for cash receipts and disbursements.
-The success of any business enterprise depends on an eﬀective system of internal control!
-Company’s plan to: !
-Adhere to policies and procedures!
-Promote operational eﬃciency!
-Minimize errors and theft!
-Enhance reliability and accuracy of accounting data !
-Sarbanes- Oxley Act of 2002 Section 404 requires that companies document their internal
controls and asses their adequacy !
-Auditors must also express their opinion about internal control !
-COSO ( Committee of Sponsoring Organizations) gives a framework for destining an internal
-Deﬁnes internal control as a process undertaken by an entity’s board of directors,
management and other personal!
-Eﬀectiveness and eﬃciency of operations!
-Reliability of ﬁnancial reporting !
-Compliance with applicable laws and regulations !
Internal Control Procedures- Cash Receipts !
-Separation of duties is critical to internal control!
-Employees involved in record keeping should not also have physical access to the assets!
-The cash receipts process is an example of separation of duties!
-Good internal control helps ensure accuracy as well as preventing theft or scandal!
-Honesty and integrity of the process!
-*Caveat* This requires hiring more people because under separation of duties there must
be person capacity to separate the duties thus companies must have adequate resources
to ﬁnance many paychecks/salaries!
Internal Control Procedures- Cash Disbursements !
-All disbursements, other than petty cash *anything material* should be made by check !
-Checks provide a permanent record of disbursements !
-All expenditures should be authorized before a check is prepared !
-Veriﬁcation of the proper ledger accounts !
-Checks should only be signed by authorized individuals!
LO7-2 Explain the possible restrictions on cash and their implications for classiﬁcation in
the balance sheet.
Restricted Cash and Compensating Balances !
-Cash that is restricted in some way and not available for current use usually reported as
concurrent asset such as investments and funds or other assets
-If the cash is material it should be classiﬁed as investments and funds or other assets !
-Some restrictions are contractually imposed !
-Disclosure notes should describe any material restrictions of cash !
-Restrictions on cash can be informal, managerially intended, or contractually imposed!
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