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week_4_class_discussion.pptxHCS/380 Health Care Accounting
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Discussion starters
What is the purpose of internal control? Why is internal control important? How might internal controls help or hinder a company’s success?
Team A
Who is responsible for establishing internal controls in the organization? What are some examples of effective internal controls?
How might a company determine if the internal controls are effective?
Team B
What is the fraud triangle? Identify the factors and explain what is meant by each.
Provide an example of the fraud triangle in employee fraud involving cash..
TOPICS AND OBJECTIVES
Week Four: Internal Control and Cash
Explain the principles of internal control.
Prepare bank reconciliations and adjusting entries.
Explain the use of cash and internal controls to prevent fraud.
GET RID OF THE STRESSORS!!!
I am changing this week’s team assignment to a presentation assignment to lessen the amount of writing you have to complete this week.
Week Five: Signature Assignment: Cash Control- This week contains the second of two Signature Assignments. The Cash Control Signature Assignment has been identified as a tool to assist the university's programmatic assessment cycle.
Internal Control and Cash
Explain the principles of internal control.
Objectives of internal control
Safeguard assets
Encourage employees to follow policy
Promote operational efficiency
Ensure accurate, reliable records
Comply with legal requirements
Publicly traded corporations must comply with the Sarbanes Oxley Act (SOX) requirements
This law requires public companies to have a system of internal controls
Auditors examine controls and issue reports on reliability
Intent was to reduce unethical behavior of executives that had occurred in the past, such as with leaders at Enron and WorldCom
Key Provisions include:
Require internal control report by companies that is generated by an outside audit firm completely independent of the company
The oversight role of boards of directors was increased
Create Public Company Accounting Oversight Board
Limited the non-audit services of auditing firms that could be used
Heavy penalties for violators – punitive fines and prosecution can occur if found guilty of misrepresentation of financial statements and results
Six principles of internal control
Establishment of responsibility
Control is most effective when only one person is responsible for a given task
For example, assigning only one employee to work at a particular cash register of a business. Thus, if the amount of cash is short per the business activity, then it can be traced back to the one employee dedicated to the register.
Segregation of duties
There are two ways to apply this control mechanism. One is to have different individuals responsible for related activities. Another approach is to separate the responsibility of record-keeping for an asset from the physical custody of that asset.
The premise of segregation of duties is that the work of one employee should, without duplication of effort, provide a reliable basis for evaluating the work of another employee.
Documentation procedures
Pre-numbered documents and checks reduces the likelihood of fraud and theft. Pre-numbering ensures that authentic documents are used and can be accounted for and tracked in an orderly and logical manner.
Any effort that involves safeguarding assets. Examples include safes, vaults, safe deposit boxes, security systems and alarms, etc.
Independent internal verification
Periodic review of data prepared by employees
This is most effective when done on a random or surprise basis to the employee to reduce the likelihood covering-up evidence of any fraudulent activities.
Physical controls
Human resource controls
It is important for human resource leaders to use internal control techniques such as background checks and rotating employees’ duties or require employees to take vacations to minimize the potential for fraud.
No matter how good a certain internal-control procedure is, it must meet the cost-benefit criterion. In other words, the cost of applying a certain internal control procedure must not exceed the benefits of the procedure. That said, good internal controls can still be violated as a result of employee fatigue, carelessness, or indifference.
Prepare bank reconciliations and adjusting entries
There are two records of a business’s cash that need to be reconciled on a monthly basis:
The Cash account in the general ledger, and
The bank statement in which the company has an account with. The amounts are usually different due to time lags in recording transactions
Bank reconciliation is designed to explain the differences
Bank side of the reconciliation requiring adjustments:
Deposits in transit
Outstanding checks
Bank errors
Company or ledger side of the reconciliation
Bank collections
Electronic funds transfers (EFT)
Service charges
Interest revenue
Nonsufficient funds (NSF) checks
Cost of printed checks
Book errors
Explain the use of cash and internal controls to prevent fraud.
Cash is the lifeblood of any company. If there is net income but no cash, a company will cease to exist because it cannot pay its bills. Thus, cash management is a very important function in a company.
Reasons for cash controls:
Cash is easy to steal
All transactions ultimately affect cash
Cash receipts should be deposited quickly
The following are ways a company can manage cash:
Monitor collection of receivables to keep the average collection period within reason.
Maintain low levels of inventory, perhaps by using just-in-time (JIT) inventory methods.
Monitor payables so that bills are not paid too early and balance this process by taking advantage of discounts offered by the suppliers.
Budget and plan for major expenses.
Invest cash-on-hand so that interest can be earned.
A company's cash position is monitored very closely.
Lack of available cash when needed can have a negative effect on business relationships and the company's stock price.
The following measures can be used to manage cash:
Cash to Daily Cash Expenses Ratio = Cash and Cash Equivalents/Average Daily Cash Expenses
Free Cash Flow = Cash Provided by Operations - Capital Expenditures
Free cash flow is the amount of cash still available to a company after meeting its capital expenditure needs.
A petty cash fund is used in a business to reimburse employees for small expenses and to pay for miscellaneous items, such as employee lunches, taxis, and other similar expenditures. Using a separate petty-cash fund to pay for such small expenses is considered a better control practice than using cash out of the daily cash receipts.
See you on week 5 !!!
