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BUSS 1030 Accounting, Business

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and Society See attached

chapter in your
Lecture 5 : Cash Management and Internal Control
Chapter 5 Pages 228-237; 249-256 Textbook
(only need to
focus on the
material covered
Abdul Razeed In lectures)
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BUSINESS SCHOOL

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Learning Objectives

Business Transactions
Chapter 4 Pages 162-179; 183-187; 195-203; Skim Read Pages 179-183
- Provide an overview of the recording process (LO1)
- Explain how the use of double-entry bookkeeping mirrors the first-
principles approach (LO2)
- Explain the importance of a trial balance (LO3)
- (Skim Read Only) Close off a simple set of accounts (LO4)
- Record a series of period-end adjustments in the accounts (LO5) – Only
up to an including depreciation
- Use an adjusted trial balance and a worksheet to complete a final set of
accounts (LO7)
- Describe a chart of accounts and its importance (LO8)

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Cash Management and Internal Control

› Identify the main elements of internal control (LO1)

› Explain the importance of control accounts and reconciliations (LO6)
› Explain the major elements of computerised accounting systems (LO7)

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Fraudulent Card Transactions

Small business owner has to pay bank for fraudulent card transactions on
his website

In the past 18 months, the e-commerce small business owner has had to cough
up about $10,000 accounting for purchases made with stolen card details on his
two websites. He has paid back about $6000 for 20 separate fraudulent
transactions in the past 18 months, plus another $4000 for fraud that has been
committed on another website he owns.

"If you check out with a credit card, NAB accepts payment, approves the card
and the funds hit our account. Then we send out the goods," he said.
"However, anywhere up to a few months later, the bank can send us a letter
saying that the card was used fraudulently.
"Then they automatically deduct the amount received for the goods and hand us
an additional $25 'chargeback' fee to cover the cost of the transaction."

Read more: http://www.smh.com.au/business/consumer-affairs/small-business-

owner-has-to-pay-bank-for-fraudulent-card-transactions-on-his-website-
20170802-gxo5rd.html accessed on 8th Feb 2018

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Past Stories

http://www.smh.com.au/nsw/duped-grandmother-sentenced-
to-jail-for-aiding-phishing-scam-20180203-h0t7b6.html

A TRUSTED accountant who fleeced $45 million from financial group

ING Holdings has been jailed for at least seven years.

A Batemans Bay woman stole more than $1.1 million from her
employers, using every cent of the ripped-off funds to feed her son’s
crippling gambling addiction, Wollongong District Court heard
yesterday.

A Perth accountant today admitted stealing almost $1 million from

a recruitment company and a financial services firm both based in
suburban Maylands.

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What is internal control?

› ‘Internal control is a process, effected by an entity’s board of

directors, management, and other personnel, designed to provide
reasonable assurance regarding the achievement of objectives
relating to operations, reporting and compliance.’ Committee of
Sponsoring Organisations of the Treadway Commission (COSO),
Internal Control—Integrated Framework, May 2013.
› Five integrated components:
1. control environment
2. risk assessment
3. control activities
4. information and communication
5. monitoring activities.

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What is internal control? (cont’d)

Internal control in practice
› Relevant to all areas:
- segregation of duties
- good records maintenance
- safeguards
- approval authorities.
- Specifically relevant to accounting:
- physical audits
- standardised documents
- trial balances
- Reconciliations

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What is internal control? (cont’d)

› Internal controls can be preventive or detective
- Preventive controls are policies and procedures designed to
prevent errors, inaccuracy or fraud before it occurs
- Detective controls are designed to identify problems that
already exist

› Key elements of internal control:

• An honest and capable staff
• Clear system of responsibility, authority, delegation and separation of
duties
• Proper procedures for processing transactions
• Production of suitable documents and records to create an audit trail
• Appropriate control over assets
• Independent verification of performance
• Processes for checking the IT system

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What is internal control? (cont’d)

› Some ways of implementing internal control:

• Develop an organisation chart and clear job descriptions
• Prepare and use a procedures manual
• Use an appropriate authorisation process
• Prepare a budget of expected results
• Use comparative financial statements
• Complete relevant reconciliations
• Number appropriate documents
• Hire good people with good references
• Appropriately train staff

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What is internal control?

(cont’d)

Some ways of implementing internal control

• Utilise a staff feedback process
• Assign appropriate responsibility for compliance
• Separate record-keeping from custodianship of assets
• Require two signatures on payments above a specified amount
• Separate purchasing from receiving
• Rotate key jobs
• Run spot checks
• Process customer complaints
• Keep detailed records of assets and limit access to the records
• Make sure all assets and liabilities really exist

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What is internal control? (cont’d)

Some ways of implementing internal control: (cont’d)
• Have clear guidelines about personal use of assets
• Verify that records of assets reflect assets in your possession
• Have safeguards to protect documents and computer files
• Regularly change passwords
• Use firewalls and protective devices
• Conduct an annual audit
• Deposit receipts intact
• Reconcile bank statements independently
• Require annual vacations to be taken
• Have and enforce a conflict of interests policy

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What is internal control? (cont’d)

Internal control and e-commerce

› E-commerce presents new challenges in internal control.
1. Electronic transactions do not have a paper trail
2. Internal controls need to be inter-organisational
3. New elements of risk
4. Internet is a public, rather than private, network
5. Lack of technical expertise
6. Legal and technical issues

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What is internal control? (cont’d)

› Special considerations for e-commerce and internal control

1. Ensure proper knowledge and skills of staff regarding effect of
e-commerce
2. Use fraud prevention tools to reduce risk
3. Comply with Payment Card Industry Data Security Standards
4. Ensure accessibility to records for audit purposes
5. Align e-commerce with overall strategy
6. Be aware of implications of outsourcing
7. Extend and expand policies to cover e-commerce
8. Ensure legal and regulatory issues are understood

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What is internal control? (cont’d)

Special considerations for e-commerce and internal control (cont’d)

9. Ensure use to firewalls and virus protection
10. Use encryption of protect messages

› Encryption – The coding of a message to make it unintelligible to any user

not authorised to read the message.

› Any internal control system must consider cybersecurity

• Many issues are international, making consensus difficult
• Threats happening more quickly than regulations

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Internal Controls for

e-Commerce

Stolen credit-card numbers

Computer viruses and Trojan horses

Impersonation of companies

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Internal Controls for

e-Commerce

› What is encryption?
› It is the primary method of achieving confidentiality in e-commerce.
› Plain-text messages are rearranged by some mathematical process.
› The encrypted message cannot be read by anyone who does not know the
process.

› What are firewalls?

› They limit access to a local network to keep out intruders
› They enable members of the local network to access the Internet while
keeping non-members out of the network
› There are usually several firewalls built into a local network

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The Limitations of
Internal Control

› Most internal control measures can be circumvented or overcome.

› Some limitations include:
- Cost versus Benefit
- Cost of establishing procedure should not exceed expected benefit
- Human element
- Collusion is when two or more employees work as a team with the
purpose to defraud the firm
- An individual can also act dishonestly and perpetrate fraud
- Size of business
- Dishonesty and judgement errors
- Unexpected transactions
- Management override
- Weak internal controls

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The Bank Account as a Control Device

› Documents used to control a bank account include:

– deposit slip
– Cheque (multiple people are required to sign)
– bank statement
– bank reconciliation
– The use of a bank reconciliation contributes significantly to good internal contol
over cash by:
- Minimising the amount of cash that must be kept on hand
- Providing a double record of all bank transactions
- one by the business
- one by the bank
- Helping a company safeguard its cash by using a bank as a depository and
clearinghouse for cheques received and written

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The Bank Reconciliation

› Reconciling the bank account

- Lack of agreement between firm’s books and bank statement can result for two
main reasons:
- Time lags
• Time between when cheque is written and dated and date it is paid by the bank
• Time between when receipts are recorded and when recorded by the bank
- Errors
• Errors by either party in recording transactions

› What are the two records of a business’ cash?

- (1) Cash account in the business’s own general ledger.
- (2) The bank statement which tells the actual amount of cash the business has
in the bank.

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The Bank Reconciliation

Items recorded by a Items on a bank statement

company not on the and not recorded by the
bank statement business
– deposits in transit – bank collections
– outstanding cheques – electronic funds transfers
– service charges
– interest earned or paid on
account
– NSF cheques (bounced
cheques)

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Bank Reconciliation Steps

› Reconciliation procedure
- Reconcile balance per books and balance per bank to their
adjusted or correct balances
- The reconciliation should be prepared by an employee who
has no other responsibilities pertaining to cash
1. Start with two figures, the balance shown on the bank
statement (balance per bank) and the balance in the
firm’s Cash at Bank account (balance per books).
2. Add to, or subtract from, the bank balance those items
that appear on the books but not on the bank
statement (the bank side of the reconciliation):
a) Add deposits in transit to the bank balance.
b) Subtract outstanding cheques from the bank balance.
c) Calculate the adjusted bank balance.

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Steps
3. After checking their correctness, journalise those
items that appear on the bank statement but not on
the firm’s books
a) Debit to Cash at Bank (1) bank collections, (2) EFT cash receipts,
and (3) interest revenue earned on money in the bank.
b) Credit to Cash at Bank (1) EFT cash payments, (2) service
charges, (3) cost of printed cheques, and (4) other bank charges
(for example, charges for dishonoured cheques or stale-date
cheques).
4. Compare the adjusted bank balance and the adjusted book
balance. The two adjusted balances should be equal.
5. Notify the bank of any errors it has made.

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Lecture Example

› In Lectures

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Computerised accounting systems

› Systems come in all sizes and degrees of complexity

› System chosen should be used appropriately and add value to the
organisation
› Computerised systems use the same principles as manual systems
› Internal control principles also apply to computerised systems
› Main elements of a computerised accounting system:
• an interface comprised of a number of sub-systems
• a sound coding system
• a variety of input methods
• automatic updates of accounting system records
• ability to produce a range of reports.

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Computerised accounting systems (cont’d)

Main elements of a computerised accounting system:

› Most computerised systems are menu-driven
› Most information only needs to be entered once and then posting and
updating happens automatically
› Usually faster and more error free than manual systems.

Cloud computing
› Ability to use and store data on an online system instead of a physical
computer
› Requires internet access
› Provides real-time data
› Allows links to external parties (banks, customers, suppliers).

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Computerised accounting systems (cont’d)

› Concerns about cloud computing include:

• internet reliability
• system provider reliability
• privacy and legal issues.

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Cash Management and Internal Control

› Identify the main elements of internal control (LO1)

› Explain the importance of control accounts and reconciliations (LO6)
› Explain the major elements of computerised accounting systems (LO7)

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