Lecture Notes on Chapter 7: Internal Control Procedures

Introduction

• Focus on internal control procedures for cash receipts and cash payments.
• Two main methods of cash receipts: over-the-counter and through the mail.

Cash Receipts

Control Procedures for Over-the-Counter Receipts

• Use of Point of Sale (POS) terminals, modern cash registers.
• POS should print receipts for each sale, ensuring each sale is recorded.
• Manager compares register total with cash in the drawer at shift end or day end.
• Cash should be deposited in bank frequently using the register total as source document for accounting.

Control Procedures for Cash Receipts by Mail

• Mailroom employee opens mail, separates checks and remittance advices (reason for payment).
• Checks sent to treasurer, who deposits them in the bank.
• Remittance advices sent to accounting for journal entry.
• Controller compares deposit ticket total to total amount debited to cash account.
• Alternate method: Lockbox system - bank handles check deposits directly.

Cash Payments

Control Procedures for Payments by Check

• Payments mainly by check; few small payments via petty cash fund.
• Checks provide record of payment, must be signed by an authorized official.
• Official reviews invoice and supporting documents before signing.
• Separation of duties: Purchasing agents shouldn’t receive goods or approve payments to prevent fraud.

Payment Packet

• Contains purchase order, invoice, and receiving report.
• Controller or treasurer reviews these documents before approving payment.
• Questions addressed: Are goods received? Are payments authorized? Are amounts correct?

Technology in Payment Processes

• Evaluated Receipts Settlement: Compresses payment approval by comparing receiving report to purchase order, bypassing invoice.
• Electronic Data Interchange (EDI): Automates transactions between customer and supplier computers, eliminating paper documents.

Conclusion

• This lesson covered internal controls for cash receipts and payments.
• Upcoming lesson focuses on the petty cash fund.