war22ech08 sarbanes oxley internal control and cash revisi

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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

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8

Sarbanes-Oxley,
Internal Control

and Cash
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After studying this chapter, you should
be able to:
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.

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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
cash.
6. Describe the accounting for specialpurpose cash funds.

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After studying this chapter, you should
be able to:
7. Describe and illustrate the reporting
of cash and cash equivalents in the
financial statements.

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Objective 1

8-1

Describe the Sarbanes-Oxley
Act of 2002 and its impact on
internal controls and
financial reporting.
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8-1

The Sarbanes-Oxley Act of 2002
(referred to simply as SarbanesOxley) 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.
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8-1

Sarbanes-Oxley requires
companies to maintain
strong and effective
internal control.

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8-1

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.
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Effect of Sarbanes-Oxley Act

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8-1

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8-1

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.
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8-2

Objective 2
Describe and illustrate the
objectives and elements of
internal control.
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Objectives of Internal Control

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8-2

To provide reasonable assurance that:
1) assets are safeguarded and used for
business purposes,
2) business information is accurate, and
3) employees comply with laws and
regulations.
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8-2

Employee fraud is the
intentional act of
deceiving an employer
for personal gain.

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Five Elements of Internal Control

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8-2

Management is responsible for designing and
applying five elements of internal control to

meet the three internal control objectives.
These elements are—
1) the control environment,
2) risk assessment,
3) control procedures,
4) monitoring, and
5) information and communication.
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8-2

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Control Environment

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8-2

A business’s control
environment is the overall
attitude of management and
employees about the
importance of controls.
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Factors That Influence the Control
Environment

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8-2

 Management’s philosophy and
operating style
 The business’s organizational
structure
 Personnel policies
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Control Environment

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8-2

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8-2

Example of control procedures for an allnight 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)
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8-2

 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)
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Indicators of Internal
Control Problems

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8-2

Warning Signs With Regard to People
1.
2.
3.
4.

Abrupt change in lifestyle.
Close social relationships with suppliers.
Refusing to take a vacation.
Frequent borrowing from other
employees.

5. Excessive use of alcohol or drugs.
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Indicators of Internal
Control Problems

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8-2

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.
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8-2
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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
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8-2

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Follow My Example 8-1
1. (c) control procedures
2. (a) the control environment
3. (b) risk assessment

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

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8-3

Objective 3
Describe and illustrate the
application of internal
controls to cash.
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Control of Cash Receipts

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8-3

One of the most important
controls to protect cash
received in over-the-counter
sales is a cash register.

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Change Fund

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8-3

A predetermined amount of
money that is given to each cash
register clerk in a cash drawer is
called a change fund.

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Cash Short and Over

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8-3

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.
Mar 19 Cash
Cash Short and Over
Sales
To record cash sales and
actual cash on hand.

3 142 000
8 000

Note that the shortage was debited to Cash
Short and Over.

3 150 000

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Control of Cash Receipts

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8-3

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Electronic Funds Transfers

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8-3

Cash may be received from
customers through electronic
funds transfers. Customers may
authorize automatic electronic
transfers from their checking
accounts to pay monthly bills.
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Voucher System

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8-3

A voucher system is a set of
procedures for authorizing and
recording liabilities and cash
payments. It may be either
manual or computerized.
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8-3

A voucher is any document
that serves as proof of
authority to pay cash or issue
an electronic funds transfer.

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8-4

Objective 4
Describe the nature of a bank
account and its use in
controlling cash.
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Use of Bank Accounts

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8-4

A major reason that
businesses use bank accounts
is for control purposes.

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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.
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Bank Statement

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8-4

A summary received from
the bank of all checking
account transaction is called
a bank statement.

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Bank Statement

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8-4

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(Continued)

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Bank Statement

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(Concluded)

8-4

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8-4

Typical credit or debit memorandum
entries found on the bank statement:

— 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.
EC

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8-4
Example Exercise 8-2

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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.
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8-4

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Follow My Example 8-2

Item No.
(1)
(2)
(3)
(4)

Appears on the
Bank Statement
as a Debit or
Credit
Memorandum
Debit Memorandum
Credit Memorandum
Debit Memorandum

Increases or
Decreases the
Balance of the
Depositor’s
Bank Account
Decreases
Increases
Decreases

Debit Memorandum

Decreases

For Practice: PE 8-2A, PE 8-2B

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Power Networking’s Records
and Bank Statement

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8-4

Bank Statement
Beginning balance
Additions:
Deposits
Miscellaneous
Deductions:
Checks
NSF checks
Service charge
Ending balance

Rp 4,218,600
Rp13,749,750
408,000
Rp 14,698,570
300,000
18,000

14,157,750

15,016,570
Rp3,359,780

Power Networking Records
Beginning balance
Rp 4,227,600
Deposits
14,565,950
Checks
16,243,560
Ending balance
Rp 2,549,990

Power Networking
should determine the
reason for difference in
these two amounts.

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8-5

Objective 5
Describe and illustrate the use
of a bank reconciliation in
controlling cash.
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8-5

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.

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Bank’s records

Beginning balance

8-5

Company’s records

Rp3,359,780 Beginning balance

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.

Rp2,549,990

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Bank’s records

Beginning balance
Add deposit not
recorded by bank

8-5

Company’s records

Rp3,359,780 Beginning balance

Rp2,549,990

816,200
Rp4,175,980

A deposit of Rp816,200 did not
appear on the bank statement.

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Bank’s records

Beginning balance
Add deposit not
recorded by bank

8-5

Company’s records

Rp3,359,780 Beginning balance Rp2,549,990
Add note and interest
816.200
collected by bank
408,000
Rp4,175,980
Rp2,957,990

The bank collected a note in the amount of
Rp400,000 and the related interest of Rp8,000 for
Power Networking

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Bank’s records

Beginning balance
Add deposit not
recorded by bank

8-5

Company’s records

Rp3,359,780 Beginning balance Rp2,549,990
Add note and interest
816.200
collected by bank
408,000
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

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.

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Bank’s records

Beginning balance
Add deposit not
recorded by bank

8-5

Company’s records

Rp3,359,780 Beginning balance Rp2,549,990
Add note and interest
816,200
collected by bank
408,000
Rp4,175,980
Rp2,957,990

Deduct outstanding
Deduct check
checks:
NSF
Rp300,000
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).

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Bank’s records

Beginning balance
Add deposit not
recorded by bank

8-5

Company’s records

Rp3,359,780 Beginning balance Rp2,549,990
Add note and interest
816,200
collected by bank
408,000
Rp4,175,980
Rp2,957,990

Deduct outstanding
Deduct check
checks:
NSF
Rp300,000
No. 812 Rp1,061,000
Bank service
No. 878
435,390
18,000
No. 883
48,600 1,544,990 charges

The bank service charges totaled Rp18,000.

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Bank’s records

Beginning balance
Add deposit not
recorded by bank

8-5

Company’s records

Rp3,359,780 Beginning balance Rp2,549,990
Add note and interest
816,200
collected by bank
408,000
Rp4,175,980
Rp2,957,990

Deduct outstanding
Deduct check
checks:
NSF
Rp300,000
No. 812 Rp1,061,000
Bank service
No. 878
435,390
18,000
No. 883
48,600 1,544,990 charges
Error recording
Check No. 879 9,000

327,000

Check No. 879 for Rp732,260 to CV Tunggal Jaya on 52
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account, erroneously recorded in journal as Rp723,260.

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Bank’s records

Beginning balance
Add deposit not
recorded by bank

8-5

Company’s records

Rp3,359,780 Beginning balance Rp2,549,990
Add note and interest
816,200
collected by bank
408,000
Rp4,175,980
Rp2,957,990

Deduct outstanding
Deduct check
checks:
NSF
Rp300,000
No. 812 Rp1,061,000
Bank service
No. 878
435,390
18,000
No. 883
48,600 1,544,990 charges
Error recording
Check No. 879 9,000 327,000
Adjusted balance
Rp2,630,990 Adjusted balance Rp2,630,990
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CV Omega Perdana
Bank Reconciliation
July 31, 2007
Cash balance according to bank statement
Add deposit of July 31, not recorded by bank

Deduct outstanding checks:
No.812
No.878
N0.883
Adjusted balance

Rp1 061 000
435 390
48 600

Cash balance according to Omega Perdana records
Add note and interest collected by bank

8-5

Rp3 359 780
816 200
Rp4 175 980

1 544 990
2 630 990
Rp2 549 990
408 000
Rp2 957 990

Deduct:
Check returned because of insufficient fund Rp 300 000
Bank service charge
18 000
Error in recording Check No.879
9 000
327 000
Adjusted balance
Rp2 630 990

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8-5

Journal entries must be
prepared for those items that
affected the company’s
(depositor’s) side of the
reconciliation.
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8-5

Company’s records

Beginning balance
Rp2,549,990
Add note and interest
collected by bank
408,000
Rp2,957,990

Deduct check
NSF
Rp300,000
Bank service
charges
18,000
Error recording
Check No. 879 9,000

327,000
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8-5

Entry to Record Plus Items

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July 31 Cash
Notes Receivable
Interest Income
Note collected by bank.

408 000
400 000
8 000

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8-5

Company’s records

Beginning balance
Rp2,549,990
Add note and interest
collected by bank
408,000
Rp2,957,990

Deduct check
NSF
Rp300,000
Bank service
charges
18,000
Error recording
Check No. 879 9,000

327,000
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8-5

Entry to Record Minus Items

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July 31 Cash
Notes Receivable
Interest Income
Note collected by bank.
31 Accounts Receivable— Thomas Tarigan
Miscellaneous Expense
Accounts Payable— CV Tunggal Jaya
Cash
NSF check, bank service
charges, and error in
recording Check no. 879.

408 000
400 000
8 000

300 000
18 000
9 000
327 000

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8-5

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Example Exercise 8-3

The following data were gathered to use in reconciling
the bank account of Depok Photo Studio
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
(Continued)

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8-5

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Example Exercise 8-3

a. What is the adjusted balance on the bank

reconciliation?
b. Journalize any necessary entries for Depok

Photo Studio based upon the bank
reconciliation.

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8-5

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Follow My Example 8-3

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
Miscellaneous Expense
Cash
For Practice: PE 8-3A, PE 8-3B

800,000
75,000
875,000
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8-6

Objective 6
Describe the
accounting for specialpurpose cash funds.
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8-6

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.
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8-6

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On August 1, issued Check No. 511 for
Rp500,000 to established a petty cash fund.
JOURNAL
Date
2008

Description

Aug. 1 Petty Cash
Cash
Established petty cash
fund issuing Check 511.

Page 9
Post.
Ref.

Debit

Credit

500 000
500 000

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8-6

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

Store Supplies

35 000

Miscellaneous Administrative Exp.
Cash
Replenished petty cash fund.

30 000
467 000

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8-6

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.
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8-6

Businesses often use special
cash funds to meet other needs,
such as payroll. Such funds are
called special-purpose funds.

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8-6

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Example Exercise 8-4
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
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account.

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8-6

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Follow My Example 8-4

a) Petty Cash
Cash

500,000
500,000

b) Office Supplies
300,000
Miscellaneous Admin. Expense 75,000
Cash Short and Over
5,000
Cash
380,000

For Practice: PE 8-4A, PE 8-4B

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8-7

Objective 7
Describe and illustrate
the reporting of cash and
cash equivalents in the
financial statements.
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8-7

A company’s excess cash is
normally invested in highly liquid
investments. These investments
are called cash equivalents.

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8-7

Companies that have
invested excess cash in
cash equivalents usually
report cash and cash
equivalents as one amount
on the balance sheet.
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8-7

Banks may require depositors to
maintain minimum cash
balances in their bank accounts.
Such a balance is called a
compensating balance.

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Ratio of Cash to Monthly
Cash Expenses

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8-7

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.
Monthly Cash Expenses =

Negative Cash Flows
from Operations
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Ratio of Cash to Monthly
Cash Expenses

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8-7

The ratio of cash to monthly
cash expenses can then be
computed as follows:
Ratio of Cash to Monthly
Cash Expenses

=

Cash and Cash Equivalent
as of Year-End
Monthly Cash Expenses

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8-7

Ratio of Cash to Monthly
Cash Expenses

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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

Rp436,000
Monthly Cash
= Rp36,300 per mo.
=
Expense
12
Monthly cash expense is sometimes
referred to as cash burn.

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Ratio of Cash to Monthly
Cash Expenses

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8-7

Ratio of Cash to
Rp1,284,000
Monthly Cash =
= Rp35,400
Rp36,300
Expenses

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.
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