Question

identify what type of internal controls would ensure proper classification of cash equivalents. How would that fit into the company's overall system of internal controls over cash? Use examples to illustrate your position, and be sure to cite GAAP to support your claims.

Answer 1

Internal Control relates to Cash and Equivalent supported by GAAP .

As per GAAP 360 , I am going to explain about Internal control system on cash and cash Equivalent .

Cash is most Liquid asset in any organization. In US market , Cash includes US treasury Bills , savings ,money market , money order , petty cash etc. Cash includes cash receipt , payment . Because of cash is so liquid , Individual are tempted to divert cash for their personal use . To safeguard of cash and equivalent , we introduced certain Internal Control system Like :

Bank Reconciliation – very basic requirement but most powerful for any organization . With help of this reconciliation, we get to know total Number of banks , any dormant account , No movement account balance .

All cash movement should be routed through proper Authorization process. Mainly control on Petty cash

Physical Control – Every company , we always keep certain fund as contingency to meet future and emergency activity . This fund should be under proper authorised person and this should be review periodically

Need to ensure safeguard of cash . We need to introduced control system in case of Account payable to supplier , We need to ensure that there should not be any dummy payment method .

As per US GAAP , we need disclose movement of Restricted cash and restricted cash Equivalent . Sometime we need to disclose reconciliation relates to restricted cash flow either on the balance sheet or at Notes to accounts .