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Adeng Pustikaningsih, M.Si.
Dosen Jurusan Pendidikan Akuntansi Fakultas Ekonomi
Universitas Negeri Yogyakarta
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8
Sarbanes-Oxley,
Internal Control
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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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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
special-purpose cash funds.
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7.
Describe and illustrate the reporting
of cash and cash equivalents in the
financial statements.
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Describe the Sarbanes-Oxley
Act of 2002 and its impact on
internal controls and
financial reporting.
Objective 1
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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.
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Sarbanes-Oxley requires
companies to maintain
strong and effective
internal control
.
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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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8-1Click to edit Master title style
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
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Describe and illustrate the
objectives and elements of
internal control.
Objective 2
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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
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Employee fraud
is the
intentional act of
deceiving an employer
for personal gain.
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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
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A business’s
control
environment
is the overall
attitude of management and
employees about the
importance of controls.
8-2
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8-2Factors That Influence the Control Environment
Management’s philosophy and
operating style
The business’s organizational
structure
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8-2Click to edit Master title style
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)
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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.
8-2
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8-2Indicators 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.
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8-2Indicators 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.
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8-2 -
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
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Follow My Example 8-11. (c) control procedures
2. (a) the control environment
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Describe and illustrate the
application of internal
controls to cash.
Objective 3
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One of the most important
controls to protect cash
received in over-the-counter
sales is a
cash
register
.
8-3
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A predetermined amount of
money that is given to each cash
register clerk in a cash drawer is
called a
change fund
.
8-3
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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
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8-3Click to edit Master title style
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
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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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A
voucher
is any document
that serves as proof of
authority to pay cash or issue
an electronic funds transfer.
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Describe the nature of a bank
account and its use in
controlling cash.
Objective 4
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A major reason that
businesses use bank accounts
is for control purposes.
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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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A summary received from
the bank of all checking
account transaction is called
a
bank statement
.
8-4
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38 36
8-4
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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.
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Example Exercise 8-2The 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
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Follow My Example 8-28-4
Appears on the Bank Statement
as a Debit or Credit
Memorandum
Increases or Decreases the Balance of the
Depositor’s
Bank Account Item No.
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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
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Describe and illustrate the use
of a bank reconciliation in
controlling cash.
Objective 5
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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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8-5Bank’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
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47 46
8-5
Beginning balance Rp3,359,780 Beginning balance Rp2,549,990
Add deposit not
recorded by bank 816,200
Rp4,175,980
A deposit of Rp816,200 did not
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48 47
8-5
Beginning balance Rp3,359,780 Beginning balance Rp2,549,990
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
Add note and interest
collected by bank 408,000
Rp2,957,990
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49 48
8-5
Beginning balance Rp3,359,780 Beginning balance Rp2,549,990
Add deposit not
recorded by bank 816.200 Rp4,175,980
Add note and interest
collected by bank 408,000 Rp2,957,990
Three checks that were written during the period did not appear on the bank statement: No. 812, Rp1,061,000;
Deduct outstanding checks:
No. 812 Rp1,061,000 No. 878 435,390
No. 883 48,600 1,544,990
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50 49
8-5
Beginning balance Rp3,359,780 Beginning balance Rp2,549,990
Add deposit not
recorded by bank 816,200 Rp4,175,980
Add note and interest
collected by bank 408,000 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
Company’s records
Bank’s records
Deduct check
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8-5Beginning balance Rp3,359,780 Beginning balance Rp2,549,990
Add deposit not
recorded by bank 816,200 Rp4,175,980
Add note and interest
collected by bank 408,000 Rp2,957,990 Deduct outstanding
checks:
No. 812 Rp1,061,000 No. 878 435,390
No. 883 48,600 1,544,990
Bank service
charges 18,000
Company’s records
Bank’s records
Deduct check
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52 51
8-5
Beginning balance Rp3,359,780
Company’s records
Beginning balance Rp2,549,990
Add deposit not
recorded by bank 816,200 Rp4,175,980
Add note and interest
collected by bank 408,000 Rp2,957,990 Deduct outstanding
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
Bank’s records
Deduct check
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8-5Beginning balance Rp3,359,780 Beginning balance Rp2,549,990
Add deposit not
recorded by bank 816,200 Rp4,175,980
Add note and interest
collected by bank 408,000 Rp2,957,990 Deduct outstanding
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
Company’s records
Bank’s records
Error recording
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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 fund Rp 300 000 Bank service charge 18 000
Error in recording Check No.879 9 000 327 000 Adjusted balance Rp2 630 990
CV Om ega Perdana Bank Reconciliation
July 31, 2007
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Journal entries must be
prepared for those items that
affected the company’s
(depositor’s) side of the
reconciliation.
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8-5Beginning 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
327,000 Error recording
Check No. 879 9,000
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8-5July 31 Cash 408 000
Note collected by bank.
Notes Receivable 400 000 Interest Income 8 000
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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
327,000 Error recording
Check No. 879 9,000
Company’s records
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8-5July 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.
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8-5
Example Exercise 8-3
The following data were gathered to use in reconciling
the bank account of Depok Photo Studio
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Example Exercise 8-3a.
What is the adjusted balance on the bank
reconciliation?
b.
Journalize any necessary entries for Depok
Photo Studio based upon the bank
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Follow My Example 8-38-5
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
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Describe the
accounting for
special-purpose cash funds.
Objective 6
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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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On August 1, issued Check No. 511 for
Rp500,000 to established a petty cash fund.
Post. Ref.
JOURNAL
Date Description Debit Credit
Page 9
Aug. 1 Petty Cash 2008 500 000
Cash 500 000
Established petty cash fund issuing Check 511.
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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
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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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Businesses often use special
cash funds to meet other needs,
such as payroll. Such funds are
called
special-purpose funds
.
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Example Exercise 8-4Prepare 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
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Follow My Example 8-48-6
a) Petty Cash 500,000
Cash 500,000
b) Office Supplies 300,000 Miscellaneous Admin. Expense 75,000 Cash Short and Over 5,000
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Describe and illustrate
the reporting of cash and
cash equivalents in the
financial statements.
Objective 7
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A company’s excess cash is
normally invested in highly liquid
investments. These investments
are called
cash equivalents
.
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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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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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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 =
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The ratio of cash to monthly
cash expenses can then be
computed as follows:
8-7
Ratio of Cash to Monthly Cash Expenses
Ratio of Cash to Monthly Cash Expenses
Cash and Cash Equivalent as of Year-End
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
8-7
Ratio of Cash to Monthly Cash Expenses
= Rp36,300 per mo.
Rp436,000
12
Monthly Cash
Expense
=
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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.
8-7
Ratio of Cash to Monthly Cash Expenses
Ratio of Cash to
Monthly Cash
Expenses