TAILIEUCHUNG - Lecture Fundamental accounting principles (21/e) - Chapter 8: Cash and internal controls

After completing this chapter you should be able to: Define internal control and identify its purpose and principles, define cash and cash equivalents and explain how to report them, compute the days’ sales uncollected ratio and use it to assess liquidity. | Cash and Internal Controls Chapter 8 Chapter 8: Cash and Internal Controls Internal Control System Policies and procedures managers use to: Protect assets. Ensure reliable accounting. C1 Managers (or owners) of small businesses often control the entire operation. These managers usually purchase all assets, hire and manage employees, negotiate all contracts, and sign all checks. They know from personal contact and observation whether the business is actually receiving the assets and services paid for. Most companies, however, cannot maintain this close personal supervision. They must delegate responsibilities and rely on formal procedures, rather than personal contact in controlling business activities. Managers use an internal control system to monitor and control business activities. An internal control system consists of the policies and procedures managers use to: Protect assets. Ensure reliable accounting. Sarbanes-Oxley Act (SOX) The Sarbanes-Oxley Act requires managers and auditors of public companies to document and certify the system of internal controls. C1 Section 404 of SOX requires that managers document and assess the effectiveness of all internal control processes that can impact financial reporting. Sen. Paul Sarbanes (D-MD) Rep. Mike Oxley (R-OH) The Sarbanes-Oxley Act (SOX) requires the managers and auditors of companies whose stock is traded on an exchange (called public companies) to document and certify the system of internal controls. Following are some of the specific requirements: Auditors must evaluate internal controls and issue an internal control report. Auditors of a client are restricted as to what consulting services they can provide that client. The person leading an audit can serve no more than seven years without a two-year break. Auditors’ work is overseen by the Public Company Accounting Oversight Board (PCAOB). Harsh penalties exist for violators—sentences up to 25 years in prison with severe fines. Section 404 of SOX requires .

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