Financial Accounting: Cash and Internal Controls

Financial Accounting Fifth Edition
Cash and
Internal Controls
CHAPTER
4 Spiceland • Thomas • Herrmann
Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 4-1
BARINGS Bank
• Founded in 1762; Headquarter in London
• Financed the Louisiana Purchase
• Personal bank to the Queen
• http://www.nickleeson.com/index.html
Unauthorised trading
1.3 billion liability for the bank
Failure of internal control – real example
Part A
INTERNAL CONTROLS
Incorrect Financial Statements
• Reasons: Human beings easy to make mistake
 Errors—accidental errors in recording

transactions or applying accounting rules
 Fraud—a person intentionally deceives another
person for personal gain or to damage that
person Manipulation
• Occupational fraud: the use of one’s occupation for
personal enrichment through the deliberate misuse or
misapplication of the employer’s resources
Employers can get stock from the firm
– managers will manipulate the financial statement
– higher stock price – get more money
Illustration 4–1
Fraud Triangle
Mangers will have the opportunity to manipulate

Opportunity — the situation
allows the fraud to occur.
Opportunity
Motivation — someone feels
the need to commit fraud,
such as the need for money.
Fraud (get the job, get reputation)
Rationalization — justification
Motivation Rationalization for the deceptive act by the
one committing the fraud.
Internal Controls
• Internal controls attempt to eliminate the

opportunity element of fraud
• Internal controls represent plans to:
 Safeguard the company’s assets
 Improve the accuracy and reliability of accounting
information
Learning Objective 1
LO4–1 Discuss the impact of accounting scandals

and the passage of the Sarbanes-Oxley Act.
Accounting Scandals and Agency problem –
managers manage the
Response by Congress company

Shareholders hold the
shares
• Managers are entrusted with the resources of

both the company’s lenders and owners
• Managers act as stewards or caretakers of the
company’s assets
• Some managers have shirked their ethical
responsibilities
 Top executives misused or misreported the
company’s funds
If the firm didn’t adjust the entry what will happen?
Ans: Increase in the net income e.g. unpaid utility, salary, interest – less Expense
Accounting Fraud in U.S. History
Enron WorldCom
Avoided reporting billions in Misclassified expenditures to

debt and losses overstate assets and profitability
The WorldCom Case
• WorldCom - What Went Wrong
http://www.youtube.com/watch?v=7g_d-phoUrU
Sarbanes-Oxley Act of 2002
Only for the U.S.
• Passed by Congress
• Also known as the Public Company Accounting
Reform and Investor Protection Act of 2002
• Applies to all companies that are required to
file financial statements with the SEC
• Established guidelines related to:
 Internal control procedures
 Auditor-client relations
Illustration 4–2
Major Provisions of the Sarbanes-
Oxley Act of 2002
Oversight board The Public Company Accounting Oversight Board (PCAOB) has the authority to establish standards dealing
with auditing, quality control, ethics, independence, and other activities relating to the preparation of
audited financial reports. The board consists of five members who are appointed by the Securities and
Exchange Commission.
Corporate Corporate executives must personally certify the company’s financial statements and financial disclosures.
Severe financial penalties and the possibility of imprisonment are consequences of fraudulent
executive misstatement.
accountability It will be corporate executive‘s liability
Nonaudit services It’s unlawful for the auditors of public companies to also perform certain nonaudit services, such as
investment advising, for their clients.
Retention of work Auditors of public companies must retain all work papers for seven years or face a prison term for willful
violation.
papers
Auditor rotation The lead auditor in charge of auditing a particular company (referred to as the audit partner) must rotate
off that company within five years and allow a new audit partner to take the lead.
Conflicts of Audit firms are not allowed to audit public companies whose chief executives worked for the audit firm
and participated in that company’s audit during the preceding year.
interest
Hiring of auditor Audit firms are hired by the audit committee of the board of directors of the company, not by company
management.
Internal control Section 404 of the act requires (a) that company management document and assess the effectiveness of
all internal control processes that could affect financial reporting and (b) that company auditors express an
opinion on whether management’s assessment of the effectiveness of internal control is fairly stated.
Smaller companies are exempt from requirement (b).
Key Point
The accounting scandals in the early 2000s
prompted passage of the Sarbanes-Oxley Act
(SOX). Among other stipulations, SOX sets forth
a variety of guidelines related to auditor-client
relations and additional internal controls.
Section 404, in particular, requires company
management and auditors to document and
assess the effectiveness of a company’s internal
controls.
Concept Check 4–1
Which of the following statements is NOT true of the
Sarbanes-Oxley Act of 2002?
a. All companies in the U.S. fall under its provisions.
b. It helped establish guidelines for internal control
procedures.
c. It helped establish corporate executive
accountability.
d. It helped establish guidelines for auditor-client
relations.
The Sarbanes Oxley Act of 2002 applies to companies who are
required to file financial statements with the SEC. It does not
apply to all companies in the U.S.
LO4–2 Identify the components, responsibilities, and

limitations of internal control.
Illustration 4–3
Components of Internal Control
Methods for collection of relevant information and communication in a timely
manner, enabling people to carry out their responsibilities.
Continual monitoring of internal activities and

reporting of deficiencies is required.
Monitoring includes formal procedures for
reporting control deficiencies.
Monitoring
on
Control activities are the policies and

cati
procedures that help ensure that management’s

ni
directives are being carried out. These activities

mu
Control Activities
include authorizations, reconciliations, and
om
separation of duties.
&C
Risk assessment identifies and analyzes internal

tion
and external risk factors that could prevent a

rma
Risk Assessment
company’s objectives from being achieved.
Info
The control environment sets the overall ethical

tone of the company with respect to internal
Control Environment control. It includes formal policies related to
management’s philosophy, assignment of
responsibilities, and organizational structure.
Illustration 4–4
Regal Entertainment’s Discussion of
Internal Controls Over Financial
Reporting
REGAL ENTERTAINMENT GROUP
Notes to the Financial Statement (excerpt)
A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Control Activities—Movie Theatre Example
Prevent the manipulation and fraud
Preventive controls
• Separation of duties – Employee selling movie tickets should
not also account for cash at the theatre.
• Physical controls – Concession supplies should be kept in a
locked room with access allowed only to authorized personnel.
• Proper authorization – Only theatre management should be
authorized to make purchases over a certain amount.
• Employee management – Employees should be made fully
aware of the company’s internal control procedures, ethical
responsibilities, and channels for reporting irregular activities.
• E-commerce controls – The theatre should maintain and
systematically check the firewall settings to prevent
unauthorized access to accounts and credit card numbers.
Control Activities—Movie Theatre Example
Detective controls
• Reconciliations – Management should periodically determine
whether the amount of physical assets of the company (cash,
concession items, movie t-shirts, etc.) agree with the
accounting records.
• Performance reviews – The amount of concessions sold should
be compared to the number of tickets sold over a period of
time.
• Audits – Hire an independent auditor to assess the theatre’s
internal control procedures to detect any deficiencies or
fraudulent behavior of employees.
Responsibilities for Internal Control
• CEO and CFO:

 Sign a report each year assessing whether the
internal controls are adequate
• Auditors:
 Provide an opinion on management’s assessment
of internal control over financial reporting
 Provide their own opinion on company’s internal
control over financial reporting
Concept Check 4–2
If a company places cash receipts from the day in a
safe or bank deposit box, this would be an example
of:
a. Separation of duties
b. Physical control
c. Reconciliation
d. Performance review
This is an example of a physical control. Important items (like cash

receipts) should be kept in safe places—like a safe or a bank deposit box.
Illustration 4–6
Excerpt from Regal Entertainment’s
Auditor’s Report Related to
Effectiveness of Internal Controls

Auditor’s Report (excerpt)
In our opinion, management’s assessment that Regal Entertainment Group maintained
effective internal control over financial reporting is fairly stated, in all material respects,
based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, Regal Entertainment Group maintained, in all material respects, effective internal
control over financial reporting, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Limitations of Internal Control
• An effective internal control system can’t turn a bad
employee into a good one
• Internal control systems are especially susceptible to
fails
collusion
 Collusion: two or more people acting together to
circumvent internal controls
• Top-level employees who can override internal
control procedures have opportunity to commit fraud
• Effective internal controls and ethical employees alone
cannot ensure success or even survival
Illustration 4–6
Regal Entertainment’s Discussion of
Limitations of Internal Controls

Management Discussion and Analysis (excerpt)
Management recognizes that there are inherent limitations in the effectiveness of any
internal control over financial reporting, including the possibility of human error and the
circumvention or overriding of internal control. Accordingly, even effective internal control
over financial reporting can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the effectiveness of
internal control over financial reporting may vary over time.
Concept Check 4–3
Everyone in the company has an impact on the
operations and effectiveness of internal control,
but who must take final responsibility?
a. Internal auditors
b. Top executives
c. The firm’s attorney
d. The majority shareholder
The top executives are the ones who must take final responsibility for the
establishment and success of internal controls. The CEO and CFO sign a
report each year assessing whether the internal controls are adequate.
Part B
CASH
LO4–3 Define cash and cash equivalents.
Illustration 4–7
Components of
the
Total Cash
Balance
Shorter than 3 months
Concept Check 4–4
Which of the following would NOT be considered a
cash equivalent?
a. Credit card sales for the day
b. Debit card sales for the day
c. Checks received from customers
d. Certificate of deposit (CD) that matures one year
from now Must within 3 months
Cash includes currency, coins, savings accounts, checking accounts, credit

card sales, debit card sales, and other cash equivalents. Cash equivalents
are generally defined as investments that mature within three months
from the date of purchase, such as money market funds, treasury bills,
and certificates of deposit. Since the CD doesn’t mature until 1 year from
now, it would NOT be considered a cash equivalent.
LO4–4 Understand controls over cash receipts and

cash disbursements.
Cash Controls
• Controls over cash receipts
 Each day: an employee should open mail and list checks
 Each day: a different employee should deposit cash and checks into the
company’s bank account
 As soon as possible: a separate employee should record cash receipts in the
accounting records
 Accept credit cards or debit cards, to limit the amount of cash handled
• Controls over cash disbursements
 Disbursements should be made by check, debit card, or credit card
 Authorize all expenditures; authorizing employee should not also prepare
the check
 Checks should be serially numbered and should require two signatures for
large amounts
 Periodically compare debit and credit card statements to purchase receipts
 Set maximum purchase limits
 Separate cash disbursement and cash receipt duties
LO4–5 Reconcile a bank statement.
Bank Reconciliation Most important
• The balance of cash in the company’s records may not equal

the balance of cash in the bank’s records
• A bank reconciliation matches the balance of cash in the bank

account with the balance of cash in the company’s own records
• Timing differences occur when the company records transactions
either before or after the bank records the same transactions
• Errors can result from mistakes by the bank or by the company.
Illustration 4–8
Bank Statement
(balance per bank statement = $4,100)
P.O. Box 26788
Odessa, TX First Bank Member FDIC
79760 A Name You Can Trust
(432) 799-BANK
Account Number: 4061009619
Account Holder: Starlight Drive-In Statement Date: March 31, 2021
221B Baker Street
Odessa, TX 79760 Account Summary
Beginning Balance
March 1, 2021
$3,800
Account Details
Deposits and Credits
Deposits and Credits Withdrawals
No. Totaland Debits Daily Balance
Date Amount Desc. Date 4 No. $8,600
Amount Desc. Date Amount
3/5 $3,600 DEP Withdrawals
3/8 293 and Debits CHK
$2,100 3/5 $7,400
3/9 3,000 NOTE 3/12 No.
294 Total2,900 CHK 3/8 5,300
3/22 1,980 DEP 3/15 7 $8,300400 EFT 3/9 8,300
3/31 20 INT 3/22 Ending Balance750 NSF 3/12 5,400
3/26March
296 31, 2021
1,900 CHK 3/15 5,000
3/28 $4,100 200 DC 3/22 6,230
3/31 50 SF 3/26 4,330
3/28 4,130
$8,600 $8,300 3/31 $4,100
Desc. DEP Customer deposit INT Interest earned SF Service fees
NOTE Note collected CHK Customer check NSF Nonsufficient funds
EFT Electronic funds transfer DC Debit card
Illustration 4–9
Company Records of Cash Activities
(balance per company records = $2,880)
STARLIGHT DRIVE-IN
Cash Account Records
March 1, 2021, to March 31, 2021
Cash Receipts Cash Disbursements
Date Description Amount Date No. Description Amount
3/5 Sales receipts $3,600 3/6 293 Salaries $2,100
3/22 Sales receipts 1,980 3/11 294 Rent 2,600
3/31 Sales receipts 2,200 3/21 295 Utilities 1,200
3/24 296 Insurance 1,900
3/30 297 Supplies 900
$7,780 $8,700
Summary of Transactions
Beginning
Cash Balance
+ March–1, 2021 =
$3,800
Cash
38
Step 1:
Reconcile the Bank’s Cash Balance
• Cash transactions recorded by the company,
but not yet recorded by its bank:
 Deposits outstanding: cash receipts of the
company that have not been added to the bank’s
record of the company’s balance
Company received the cash but bank dun know
 Checks outstanding: checks the company has
written that have not been subtracted from the
bank’s record of the company’s balance
 Bank errors The company paid the money bank dun know
Example
Comparing Receipts and Disbursements
Cash receipts of the company Cash receipts known by the bank
Deposits Deposits and Credits
Date Desc. Amount Date Amount Desc.
3/5 Sales receipts $3,600 3/5 $3,600 DEP
3/22 Sales receipts 1,980 3/9 3,000
3/31 Sales receipts 2,200 NOTE
3/22 1,980 DEP
3/31 20 INT
Deposit Outstanding
(not in current bank balance)
Checks written by the company Checks known by the bank

#293 $2,100
#294 $2,600 #293 $2,100
#295 $1,200 #294 (error $2,900
fixed later)
#296 $1,900
#297 $900 #296 $1,900
Checks Outstanding
(not in current bank balance)
Illustration 4–10
Bank Reconciliation
STARLIGHT DRIVE-IN
Bank Reconciliation
March 31, 2021
Bank’s Cash Balance Company’s Cash Balance
Per bank statement $4,100 Per general ledger $ 2,880
Deposits outstanding: +2,200
3/31 = $2,200
Checks outstanding: –2,100

#295 = $1,200
#297 = $ 900
Bank balance per

reconciliation $4,200
41
Step 2:
Reconcile the Company’s Cash Balance
• Cash transactions recorded by bank but not company
• Common items that will increase the company’s cash balance
include:
 Bank collections on the company’s behalf
 Interest earned on average daily balance
• Common items that will decrease the company’s cash balance

include:
 Electronic funds transfers (EFTs)
 NSF checks – customers’ checks written on “nonsufficient
funds,” otherwise known as “bad” checks)

 Debit card purchases
Bank will deduct it but company dun know
 Bank service fees.
• Company errors
Illustration 4–8
Bank Statement
(balance per bank statement = $4,100)
P.O. Box 26788
Odessa, TX First Bank Member FDIC
79760 A Name You Can Trust
(432) 799-BANK
Account Number: 4061009619
Account Holder: Starlight Drive-In Statement Date: March 31, 2021
221B Baker Street
Odessa, TX 79760 Account Summary
Beginning Balance
March 1, 2021
$3,800
Account Details
Deposits and Credits
Deposits and Credits Withdrawals
No. Totaland Debits Daily Balance
Date Amount Desc. Date 4 No. $8,600
Amount Desc. Date Amount
3/5 $3,600 DEP Withdrawals
3/8 293 and Debits CHK
$2,100 3/5 $7,400
$200
3/9 3,000 NOTE interest 3/12 No.
294 Total 2,900 CHK Fix $300 3/8 5,300
3/22 1,980 DEP 3/15 7 $8,300400 EFT error 3/9 8,300
3/31 20 INT 3/22 Ending Balance750 NSF 3/12 5,400
3/26March
296 31, 2021
1,900 CHK 3/15 5,000
Items not yet added to 3/28
company’s cash balance $4,100 200 DC 3/22 6,230
3/31 50 SF 3/26 4,330
Items not yet subtracted from 3/28 4,130
$8,600 the company’s cash balance $8,300 3/31 $4,100
Desc. DEP Customer deposit INT Interest earned SF Service fees
NOTE Note collected CHK Customer check NSF Nonsufficient funds
EFT Electronic funds transfer DC Debit card
Illustration 4–11
Bank Reconciliation
STARLIGHT DRIVE-IN
Bank Reconciliation
March 31, 2021
Bank's Cash Balance Company's Cash Balance
Per bank statement $4,100 Per general ledger $2,880

Note Received +2,800
Deposits outstanding: +2,200
3/31 = $2,200 Interest earned from note +200
Interest earned on bank account +20
Step 3:
NSF Check −750 Update
Checks outstanding: −2,100
#295 = $1,200 Debit card for office equipment −200 company
#297 = $ 900 records
EFT for advertising −400
Service fee −50
Corrected rent expense error −300
$4,200 Company balance per reconciliation $4,200

Bank balance per reconciliation
Step 1 Step 2
Reconciled
44
Illustration 4-12
Summary of Items Included in the
Bank Reconciliation
Bank’s Company’s
Cash Balance Cash Balance
Per bank statement Per general ledger
Timing + Deposits outstanding + Notes received by bank

Differences − Checks outstanding + Interest received
− NSF checks received
− Unrecorded debit card payments
− Unrecorded EFT payments
− Bank service fees
Errors ± Bank errors ± Company errors

= Bank balance per reconciliation = Company balance per reconciliation
45
Concept Check 4–5
Which of the following items would be found on the
“bank side,” or the left-hand side, of the bank
reconciliation?
a. Interest income received on the account
b. Deposits outstanding
c. NSF check from a customer
d. Service fee charged by the bank
The common items that are shown on the left-hand side of the bank
reconciliation include deposits outstanding, checks outstanding, and
bank errors. All of the other items would appear on the “company’s
side,” or the right-hand side, of the bank reconciliation.
Concept Check 4–6
How would an NSF check from a customer be
treated on a bank reconciliation?
a. Addition on the bank side
b. Deduction on the bank side
c. Addition on the company side
d. Deduction on the company side
An NSF check would be shown on the company’s side—the right-hand
side—and it would be shown as a deduction. This is because when the
company originally deposited the customer’s check, they increased the
Cash account. Now that the check has been discovered to be an NSF
check, or a nonsufficient funds check, the company must reverse the
cash out of its books, resulting in a decrease, or a deduction, on the
company’s side of the bank reconciliation.
Common Mistake
Sometimes students mistake an NSF check as a
bad check written by the company instead of
one written to the company. When an NSF check
occurs, the company has deposited a customer’s
check, but the customer did not have enough
funds to cover the check. The company must
adjust the balance of the cash account
downward to reverse the increase in cash it
recorded at the time of the deposit.
Step 3:
Update the Company’s Cash Account
• We examine items used to reconcile the
company’s cash balance
• Debit Cash for items that add to the balance
• Credit Cash for items that subtract from the
balance
Record items that increase cash
March 31, 2021 Debit Credit
Cash ……………………………….……………………………. 3,020
Notes Receivable…………………………………... 2,800
Interest Receivable (from note)…………….. 200
Interest Revenue (from bank account) …. 20
(Record collection on note and interest earned)
Record items that decrease cash

March 31, 2021 Debit Credit
Accounts Receivable…………………………………… 750
Equipment …………………………………….…………… 200
Advertising Expense …………………………………. .. 400
Service Fee Expense …………………………………… 50
Rent Expense ……………………………………………... 300
Cash ………………………………………………………… 1,700
(Record NSF check, equipment purchase, advertising payment, bank
service fee, and check correction for rent)
Concept Check 4–7
How would an NSF check from a customer be
recorded in the accounting records?
a. Debit Accounts Receivable; Credit Cash
b. Debit Cash; Credit Accounts Receivable
c. Debit Accounts Payable; Credit Cash
d. Debit Cash; Credit Miscellaneous Expense
Accounts Receivable is debited in order to increase that asset

account to show that the customer who paid with an NSF check
still owes the company money. The Cash account is credited
because the company must adjust its balance of cash downward
to reverse the increase in cash it recorded at the time it received
the check from the customer.
Common Mistake
Some students try to update the Cash account for deposits
outstanding, checks outstanding, or a bank error. The
company does not need to adjust for these items related
to reconciling the bank’s balance because they are already
properly recorded in the company’s accounting records.
LO4–6 Account for employee purchases.
Account for Employee Purchases
• Petty cash fund: small amount of cash kept on
hand to pay for minor purchases
 Accounting for the petty cash fund involves:
• Establishing the fund
• Recognizing expenditures from the fund
• Replenishing the fund
• Company-issued debit and credit cards
 Debit cards (and checks) captured in the bank
reconciliation
 Credit card purchases need to be recorded
Petty Cash Example
• Establish a petty cash fund of $200
• Remove cash from the bank and place it on
hand at the company
May 1 Debit Credit
Petty Cash (on hand) …………..………………… 200
Cash (checking account) …………………….. 200
(Establish the petty cash fund)
Employee Purchases
Petty Cash Fund Purchasing Manager Marketing Manager
(Cash) (Credit Card) (Credit Card)
Item Amount Item Amount Item Amount
Lunch $60 Supplies $800 Advertising $1,500
Delivery $90 Supplies $600 Postage $1,200
• Record employee purchases

May 31 Debit Credit
Entertainment Expense ……………………………………… 60
Delivery Expense ……………………..………………………... 90
Supplies ($800 + $600) ……………………………………….. 1,400
Advertising Expense ……………………………………………. 1,500
Postage Expense …………………………………………….…… 1,200
Cash …………………………………………………………… 150
Accounts Payable ………………………………………………… 4,100
(Recognize employee expenditures)
Employee Purchases
• Replenish the petty cash fund

• Withdraw additional cash from the bank
and place it on hand at the company
• Petty cash fund increases to $200
May 1 Debit Credit
Petty Cash (on hand) …………..………………… 150
Cash (checking account) …………………….. 150
(Replenish the petty cash fund)
Analysis
CASH ANALYSIS
LO4–7 Assess cash holdings by comparing cash to

noncash assets.
Example
Comparing Regal Entertainment to Cinemark
($ in millions) Cash and Cash Noncash
Equivalents Assets Ratio
Regal Entertainment $147.1 $2,392.4 6.1%
Cinemark Holdings $638.9 $3,513.1 18.2%
Trend in operating cash flows

($ in millions) Operating Cash Flows
Year Regal Entertainment Cinemark Holdings
2012 $346.6 $395.2
2013 $346.9 $309.7
2014 $349.1 $454.6
Concept Check 4–9
Which of the following statements is true?
a. Having too much cash represents idle resources
that are not being used to produce revenues.
b. One way to assess cash holdings is to compare
cash assets to noncash assets.
c. In recent years cash holdings have increased
tremendously.
Real world
d. All of the above are true.
All of the above statements about cash are true.
Summary
1. LO4–1 Discuss the impact of accounting
scandals and the passage of the Sarbanes-Oxley
Act.
2. LO4–2 Identify the components, responsibilities,
and limitations of internal control.
3. LO4–3 Define cash and cash equivalents.
4. LO4–4 Understand controls over cash receipts
and cash disbursements.
Summary
1. LO4–5 Reconcile a bank statement.
2. LO4–6 Account for employee
purchases.
3. LO4–7 Assess cash holdings by
comparing cash to noncash assets.
End of Chapter 4

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Financial Accounting: Cash and Internal Controls

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Financial Accounting Fifth Edition

4 Spiceland • Thomas • Herrmann

Failure of internal control – real example

 Errors—accidental errors in recording

Mangers will have the opportunity to manipulate

• Internal controls attempt to eliminate the

LO4–1 Discuss the impact of accounting scandals

Response by Congress company

• Managers are entrusted with the resources of

Avoided reporting billions in Misclassified expenditures to

LO4–2 Identify the components, responsibilities, and

Continual monitoring of internal activities and

Control activities are the policies and

procedures that help ensure that management’s

directives are being carried out. These activities

Risk assessment identifies and analyzes internal

and external risk factors that could prevent a

The control environment sets the overall ethical

• CEO and CFO:

This is an example of a physical control. Important items (like cash

REGAL ENTERTAINMENT GROUP

REGAL ENTERTAINMENT GROUP

LO4–3 Define cash and cash equivalents.

Cash includes currency, coins, savings accounts, checking accounts, credit

LO4–4 Understand controls over cash receipts and

LO4–5 Reconcile a bank statement.

• The balance of cash in the company’s records may not equal

• A bank reconciliation matches the balance of cash in the bank

Checks written by the company Checks known by the bank

Checks outstanding: –2,100

Bank balance per

 Interest earned on average daily balance

• Common items that will decrease the company’s cash balance

 NSF checks – customers’ checks written on “nonsufficient

funds,” otherwise known as “bad” checks)

Per bank statement $4,100 Per general ledger $2,880

$4,200 Company balance per reconciliation $4,200

Timing + Deposits outstanding + Notes received by bank

Errors ± Bank errors ± Company errors

(Record collection on note and interest earned)

Record items that decrease cash

Accounts Receivable is debited in order to increase that asset

LO4–6 Account for employee purchases.

• Record employee purchases

• Replenish the petty cash fund

LO4–7 Assess cash holdings by comparing cash to

Trend in operating cash flows

All of the above statements about cash are true.

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