Adeng Pustikaningsih, M.Si. Dosen Jurusan Pendidikan Akuntansi...

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Adeng Pustikaningsih, M.Si.

Dosen Jurusan Pendidikan Akuntansi

Fakultas Ekonomi

Universitas Negeri Yogyakarta

CP: 08 222 180 1695

Email : adengpustikaningsih@uny.ac.id

8 Sarbanes-Oxley, Internal Control

and Cash

1. Describe the Sarbanes-Oxley Act of

2002 and its impact on internal

controls and financial reporting.

2. Describe and illustrate the objectives

and elements of internal control.

3. Describe and illustrate the application

of internal controls to cash.

After studying this chapter, you should

be able to:

4. Describe the nature of a bank account

and its use in controlling cash.

5. Describe and illustrate the use of a

bank reconciliation in controlling

6. Describe the accounting for special-

purpose cash funds.

be able to:

7. Describe and illustrate the reporting

of cash and cash equivalents in the

financial statements.

be able to:

Describe the Sarbanes-Oxley

Act of 2002 and its impact on

internal controls and

financial reporting.

Objective 1

The Sarbanes-Oxley Act of 2002

(referred to simply as Sarbanes-

Oxley) applies only to companies

whose stock is traded on public

exchanges. Its purpose is to restore

public confidence and trust in the

financial statements of companies.

Sarbanes-Oxley requires

companies to maintain

strong and effective

internal control.

Internal control is broadly

defined as the procedures and

processes used by a company to

safeguard its assets, process

information accurately, and

ensure compliance with laws

and regulations.

8-1 Effect of Sarbanes-Oxley Act

As a company that listed on the New York Stock Exchange, Telkom is obliged to comply with all existing rules, including the Sarbanes Oxley Act (SOA). The SOA requires internal control over the financing reporting and

guarantee from Telkom’s management that all information in the financial report is accurate and can be

accounted for. To meet the SOA requirement, Telkom has conducted internal improvement through organizational transformation and the application of Good Corporate

Governance (GCG) policies. The internal control over the financing reporting has become the priority for improving

the system.

Describe and illustrate the

objectives and elements of

internal control.

Objective 2

1) assets are safeguarded and used for

business purposes,

2) business information is accurate, and

3) employees comply with laws and

regulations.

To provide reasonable assurance that:

8-2 Objectives of Internal Control

Employee fraud is the

intentional act of

deceiving an employer

for personal gain.

1) the control environment,

2) risk assessment,

3) control procedures,

4) monitoring, and

5) information and communication.

Management is responsible for designing and

applying five elements of internal control to

meet the three internal control objectives.

These elements are—

8-2 Five Elements of Internal Control

A business’s control

environment is the overall

attitude of management and

employees about the

importance of controls.

8-2 Control Environment

8-2 Factors That Influence the Control

Environment

Management’s philosophy and

operating style

The business’s organizational

structure

Personnel policies

8-2 Control Environment

Example of control procedures for an all-

night convenience store:

Locate the cash register near the door, so that

it is fully visible from outside the store; have

two employees work late hours; employ a

security guard.

Deposit cash in the bank daily, before 5 p.m.

(Continued)

Keep only small amounts of cash on hand

after 5 p.m. by depositing excess cash in a

store safe that can’t be opened by

employees on duty.

Install cameras and alarm systems.

(Concluded)

8-2 Indicators of Internal

Control Problems

Warning Signs With Regard to People

1. Abrupt change in lifestyle.

2. Close social relationships with suppliers.

3. Refusing to take a vacation.

4. Frequent borrowing from other

employees.

5. Excessive use of alcohol or drugs.

8-2 Indicators of Internal

Control Problems

Warning Signs from the

Accounting System

1. Missing documents or gaps in transaction

numbers.

2. An unusual increase in customer refunds.

3. Differences between daily cash receipts

and bank deposits.

4. Sudden increase in slow payments.

5. Backlog in recording transactions.

Example Exercise 8-1

Identify each of the following as relating to (a)

the control environment, (b) risk assessment, or

(c) control procedures.

1. Mandatory vacations

2. Personnel policies

3. Report of outside consultants on

future market changes

Follow My Example 8-1

For Practice: PE 8-1A, PE 8-1B

1. (c) control procedures

2. (a) the control environment

3. (b) risk assessment

Describe and illustrate the

application of internal

controls to cash.

Objective 3

One of the most important

controls to protect cash

received in over-the-counter

sales is a cash register.

8-3 Control of Cash Receipts

A predetermined amount of

money that is given to each cash

register clerk in a cash drawer is

called a change fund.

8-3 Change Fund

Mar 19 Cash 3 142 000

Cash Short and Over 8 000

To record cash sales and

actual cash on hand.

Sales 3 150 000

Cash sales for March 19 totaled Rp3,150,000

per the cash register tape. After removing the

change fund, only Rp3,142,000 was on hand.

8-3 Cash Short and Over

Note that the shortage was debited to Cash

Short and Over.

8-3 Control of Cash Receipts

Cash may be received from

customers through electronic

funds transfers. Customers may

authorize automatic electronic

transfers from their checking

accounts to pay monthly bills.

8-3 Electronic Funds Transfers

A voucher system is a set of

procedures for authorizing and

recording liabilities and cash

payments. It may be either

manual or computerized.

Voucher System 8-3

A voucher is any document

that serves as proof of

authority to pay cash or issue

an electronic funds transfer.

Describe the nature of a bank

account and its use in

controlling cash.

Objective 4

A major reason that

businesses use bank accounts

is for control purposes.

Use of Bank Accounts 8-4

Bank accounts provide an

independent recording of cash

transactions that can be used as a

verification of the business’s

recording of transactions.

A summary received from

the bank of all checking

account transaction is called

a bank statement.

8-4 Bank Statement

(Continued)

8-4 Bank Statement

(Concluded) 37

Typical credit or debit memorandum

entries found on the bank statement:

EC — Error correction to correct bank

error.

NSF — Not sufficient funds check.

SC — Service charge.

ACH — Automated Clearing House entry

for electronic funds transfer.

MS — Miscellaneous items.

The following items may appear on a bank statement:

(1) NSF check

(2) EFT Deposit

(3) Service Charge

(4) Bank correction of an error from recording a

Rp400,000 check as Rp40,000.

Indicate whether the item would appear as a debit or credit

memorandum on the bank statement and whether the item

would increase or decrease the balance of depositor’s

account.

Appears on the

Bank Statement

as a Debit or

Credit

Memorandum

Increases or

Decreases the

Balance of the

Depositor’s

Bank Account Item No.

(1) Debit Memorandum Decreases

(2) Credit Memorandum Increases

Beginning balance Rp 4,218,600

Additions:

Deposits Rp13,749,750

Miscellaneous 408,000 14,157,750

Deductions:

Checks Rp 14,698,570

NSF checks 300,000

Service charge 18,000 15,016,570

Ending balance Rp3,359,780

Bank Statement

Beginning balance Rp 4,227,600

Deposits 14,565,950

Checks 16,243,560

Ending balance Rp 2,549,990

Power Networking Records

Power Networking

should determine the

reason for difference in

these two amounts.

Power Networking’s Records

and Bank Statement

Describe and illustrate the use

of a bank reconciliation in

controlling cash.

Objective 5

A bank reconciliation is an analysis of

the items and amounts that cause the

cash balance reported in the bank

statement to differ from the balance of

the cash account in the ledger in order

to determine the adjusted cash balance.

Bank’s records

Beginning balance Rp3,359,780 Beginning balance Rp2,549,990

Power Network prepares to reconcile

the monthly bank statement as of

July 31. The bank statement shows

an ending cash balance of

Rp3,359,780. The company’s Cash

account has a July 31 balance of

Rp2,549,990.

Company’s records

Add deposit not

recorded by bank 816,200

Rp4,175,980

A deposit of Rp816,200 did not

appear on the bank statement.

Company’s records Bank’s records

Add deposit not

recorded by bank 816.200

Rp4,175,980

The bank collected a note in the amount of

Rp400,000 and the related interest of Rp8,000 for

Power Networking

Add note and interest

collected by bank 408,000

Rp2,957,990

Add deposit not

recorded by bank 816.200

Rp4,175,980

Rp2,957,990

Three checks that were written during the period did not

appear on the bank statement: No. 812, Rp1,061,000;

No. 878, Rp435,390, No. 883, Rp48,600.

Deduct outstanding

checks:

No. 812 Rp1,061,000

No. 878 435,390

No. 883 48,600 1,544,990

Add deposit not

Rp4,175,980

Rp2,957,990 Deduct outstanding

checks:

No. 812 Rp1,061,000

No. 878 435,390

No. 883 48,600 1,544,990

The bank returned a check for Rp300,000 from

customer (Thomas Tarigan) because of insufficient

funds (NSF).

Deduct check

NSF Rp300,000

Add deposit not

Rp4,175,980

checks:

No. 812 Rp1,061,000

No. 878 435,390

No. 883 48,600 1,544,990

Bank service

charges 18,000

The bank service charges totaled Rp18,000.

Deduct check

NSF Rp300,000

Beginning balance Rp3,359,780

Company’s records

Add deposit not

Rp4,175,980

checks:

No. 812 Rp1,061,000

No. 878 435,390

No. 883 48,600 1,544,990

Bank service

charges 18,000

Error recording

Check No. 879 9,000

327,000

Check No. 879 for Rp732,260 to CV Tunggal Jaya on

account, erroneously recorded in journal as Rp723,260.

Bank’s records

Deduct check

NSF Rp300,000

Add deposit not

Rp4,175,980

checks:

No. 812 Rp1,061,000

No. 878 435,390

No. 883 48,600 1,544,990

Deduct check

NSF Rp300,000

Bank service

charges 18,000

Adjusted balance Rp2,630,990 Adjusted balance Rp2,630,990

Error recording

Check No. 879 9,000 327,000

Cash balance according to bank statement Rp3 359 780

Add deposit of July 31, not recorded by bank 816 200

Rp4 175 980

Deduct outstanding checks:

No.812 Rp1 061 000

No.878 435 390

N0.883 48 600 1 544 990

Adjusted balance 2 630 990

Cash balance according to Omega Perdana records Rp2 549 990

Add note and interest collected by bank 408 000

Rp2 957 990

Deduct:

Check returned because of insufficient fundsRp 300 000

Bank service charge 18 000

Error in recording Check No.879 9 000 327 000

Adjusted balance Rp2 630 990

CV Omega Perdana

Bank Reconci l iat ion

July 31, 2007

Journal entries must be

prepared for those items that

affected the company’s

(depositor’s) side of the

reconciliation.

Rp2,957,990

Deduct check

NSF Rp300,000

Bank service

charges 18,000

327,000

Error recording

Check No. 879 9,000

Company’s records

July 31 Cash 408 000

Note collected by bank.

Notes Receivable 400 000

Interest Income 8 000

Entry to Record Plus Items

Rp2,957,990

Deduct check

NSF Rp300,000

Bank service

charges 18,000

327,000

Error recording

Check No. 879 9,000

Company’s records

July 31 Cash 408 000

Note collected by bank.

Notes Receivable 400 000

Interest Income 8 000

31 Accounts Receivable— Thomas Tarigan 300 000

Miscellaneous Expense 18 000

Accounts Payable— CV Tunggal Jaya 9 000

Cash 327 000

NSF check, bank service

charges, and error in

recording Check no. 879.

Entry to Record Minus Items

The following data were gathered to use in reconciling

the bank account of Depok Photo Studio

58 (Continued)

Balance per bank Rp14,500,000

Balance per company records 13,875,000

Bank service charges 75,000

Deposit in transit 3,750,000

NSF check 800,000

Outstanding checks 5,250,000

a. What is the adjusted balance on the bank

reconciliation?

b. Journalize any necessary entries for Depok

Photo Studio based upon the bank

reconciliation.

a. Rp13,000,000 as shown below.

Bank section of reconciliation: Rp14,500,000 –

Rp5,250,000 + Rp3,750,000 = Rp13,000,000

Company section of reconciliation: Rp13,875,000

– Rp75,000 – Rp800,000 = Rp13,000,000

b. Accounts Receivable 800,000

Miscellaneous Expense 75,000

Cash 875,000

Describe the

accounting for special-

purpose cash funds.

Objective 6

It is usually not practical for a

business to write checks to pay

small amounts. Thus, it is

desirable to control such

payments by using a special cash

fund, called a petty cash fund.

On August 1, issued Check No. 511 for

Rp500,000 to established a petty cash fund.

JOURNAL

Date Description Debit Credit

Aug. 1 Petty Cash 500 000 2008

Cash 500 000

Established petty cash

fund issuing Check 511.

At the end of August, the petty cash receipts indicated

expenditures for the following items: office supplies, Rp380,000,

postage (office supplies), Rp22,000; store supplies, Rp35,000,

and miscellaneous administrative items, Rp30,000.

Aug. 31 Office Supplies 402 000

Replenished petty cash fund.

Cash 467 000

Store Supplies 35 000

Miscellaneous Administrative Exp. 30 000

Replenishing the petty cash fund

restores it to its original amount

of Rp500,000. Note that there is

no entry to Petty Cash when the

fund is replenished.

Businesses often use special

cash funds to meet other needs,

such as payroll. Such funds are

called special-purpose funds.

Prepare journal entries for each of the following;

a) Issued check to establish a petty cash fund of

Rp500,000.

b) The amount of cash in the petty cash fund is

currently Rp120,000. Issued a check to replenish the

fund, based on the following summary of petty cash

receipts: office supplies, Rp300,000 and

miscellaneous administrative expense, Rp75,000.

Record any missing funds in the cash short and over

account. 67

a) Petty Cash 500,000

Cash 500,000

b) Office Supplies 300,000

Miscellaneous Admin. Expense 75,000

Cash Short and Over 5,000

Cash 380,000

Describe and illustrate

the reporting of cash and

cash equivalents in the

financial statements.

Objective 7

A company’s excess cash is

normally invested in highly liquid

investments. These investments

are called cash equivalents.

Companies that have

invested excess cash in

cash equivalents usually

report cash and cash

equivalents as one amount

on the balance sheet.

Banks may require depositors to

maintain minimum cash

balances in their bank accounts.

Such a balance is called a

compensating balance.

A cash ratio that is especially useful for

companies, starting up or in financial

distress, is the ratio of cash to monthly

cash expenses. First, the monthly cash

expenses are determined.

8-7 Ratio of Cash to Monthly

Cash Expenses

Monthly Cash Expenses =

Negative Cash Flows

from Operations

The ratio of cash to monthly

cash expenses can then be

computed as follows:

Cash Expenses

Ratio of Cash to Monthly

Cash Expenses

Cash and Cash Equivalent

as of Year-End

Monthly Cash Expenses =

Northwest Airlines Corporation reported the following

data (in millions) at the end of 2005:

Negative cash flows from operations Rp(436,000)

Cash and cash equivalents, Dec. 31, 2005 1,284,000

Cash Expenses

= Rp36,300 per mo. Rp436,000

Monthly Cash

Expense =

Monthly cash expense is sometimes

referred to as cash burn.

Rp1,284,000

Rp36,300 = Rp35,400

Interpretation: As of December 31, 2007,

Northwest would run out of cash in less than

three years months unless it changes it

operations, sells investments, or raises

additional funds.

Cash Expenses

Ratio of Cash to

Monthly Cash

Expenses =

Adeng Pustikaningsih, M.Si. Dosen Jurusan Pendidikan Akuntansi...

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