Course : ACCT6497055- Accounting & Finance for

Digital Business
Effective Period : February 2023

Internal Control and Cash

Session 6
 Material References :

Warren, Carl S. & Jones, Jefferson P. (2021). Corporate

Financial Accounting. 16, Cengage. Boston
 Targeted Learning Outcome :

LO1 : Understand the concept of accounting, accounting

cycle, internal control, organization, stocks & dividends,
financial environment, banks and other financial
institutions, time value of money, and the digital
revolution and the future of money

LO3 : Apply the accounting cycle, internal control and

cash, financial statement analysis, bank loans, working
capital management and short-term financing for
business.
 Sub topic
Internal Control

Risk Asessment

Control Procedures

Cash Controls

Bank Account Reconciliation

 Internal Control

Internal Control—Integrated Framework is the standard by which companies

design, analyze, and evaluate internal control.

Objectives of Internal Control

The objectives of internal control are to provide reasonable assurance that:
▪ Assets are safeguarded and used for business purposes.
▪ Business information is accurate.
▪ Employees and managers comply with laws and regulations.

Elements of Internal Control

Five elements of internal control set forth by the Integrated Framework. These
elements are as follows:
▪ Control environment
▪ Risk assessment
▪ Control procedures
▪ Monitoring
▪ Information and communication
Elements of Internal Control
(Control Environment)
 Elements of Internal Control
(Risk Asessment)
All businesses face risks such as changes in customer requirements,
competitive threats, regulatory changes, and changes in economic
factors. Management should identify such risks, analyze their
significance, assess their likelihood of occurring, and take any necessary
actions to minimize them.

2 types of risk assessment are:

A. Internal assessment
The purpose of this assessment is to assess internal strengths and
weaknesses
B. External assessment
The purpose of this assessment is to assess opportunity and threats
 Elements of Internal Control
(Control Procedures)
Control procedures provide reasonable assurance that business goals
will be achieved, including the prevention of fraud.

• Competent personnel, rotating duties, and mandatory vacations

• Separating responsibilities for related operations
• Separating operations, custody of assets, and accounting
• Proofs and security measures
 Elements of Internal Control
(Monitoring)

Monitoring the internal control system is used to locate weaknesses and

improve controls. Monitoring often includes observing employee
behavior and the accounting system for indicators of control problems.

Evaluations of controls are often performed when there are major

changes in strategy, senior management, business structure, or
operations. Internal auditors, who are independent of operations,
usually perform such evaluations. Internal auditors are also responsible
for day-to-day monitoring of controls. External auditors also evaluate
and report on internal control as part of their annual financial statement
audit.
 Elements of Internal Control
(Information & Communication)

Information and communication is an essential element of internal

control. Information about the control environment, risk assessment,
control procedures, and monitoring is used by management for guiding
operations and ensuring compliance with reporting, legal, and
regulatory requirements.

Management also uses external information to assess events and

conditions that impact decision making and external reporting.
 Cash Controls
Control of Cash Receipts
To protect cash from theft and misuse, a business must control cash from the time it is
receivedmuntil it is deposited in a bank. Businesses normally receive cash from two main sources.
▪ Customers purchasing products or services
▪ Customers making payments on account

A. Cash Received from Cash Sales

Salespersons may make errors in making change for customers or in ringing up cash sales. As a
result, the amount of cash on hand may differ from the amount of cash sales. Such differences are
recorded in a cash short and over account.
To illustrate, assume the following cash register data for May 3:
Cash register total for cash sales $35,690
Cash receipts from cash sales 35,668
The cash sales, receipts, and shortage of $22 ($35,690 – $35,668) would be journalized as follows:
 Cash Controls

B. Control of Cash Payments

The control of cash payments should provide reasonable assurance that:
▪ Payments are made for only authorized transactions.
▪ Cash is used effectively and efficiently. For example, controls should ensure that all available
purchase discounts are taken.

In a small business, an owner/manager may authorize payments based on personal knowledge.

In a large business, however, purchasing goods, inspecting the goods received, and verifying the
invoices are usually performed by different employees. These duties must be coordinated to ensure
that proper payments are made to creditors. One system used for this purpose is the voucher system.
 Bank Reconciliation

A bank reconciliation is an analysis of the items and amounts creating

the difference between the cash balance reported on the bank
statement and the balance of the cash account in the ledger. The
adjusted cash balance determined in the bank reconciliation is reported
on the balance sheet. A bank reconciliation is usually divided into two
sections as follows:

1. The bank section begins with the cash balance according to the bank
statement and ends with the adjusted balance.

2. The company section begins with the cash balance according to the
company’s records and ends with the adjusted balance.
 Bank Reconciliation

The adjusted balances in the bank and company sections of the reconciliation must be
equal. If the balances are not equal, an item has been overlooked and must be found.
 Bank Reconciliation

The adjusted balances in the bank and company sections of the reconciliation must be
equal. If the balances are not equal, an item has been overlooked and must be found.
 Thank you
and
See you next week