ch08 Fraud, Internal Control and Cash

8/10/2019 ch08 Fraud, Internal Control and Cash

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Chapter8-1

Chapter

8

Fraud, InternalControl and Cash

Accounting Principles, Ninth Edition


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Chapter8-2

1. Define fraud and internal control.2. Identify the principles of internal control.

3. Explain the applications of internal control principlesto cash receipts.

4. Explain the applications of internal control principlesto cash disbursements.

5. Describe the operation of a petty cash fund.

6. Indicate the control features of a bank account.

7. Prepare a bank reconciliation.

8. Explain the reporting of cash.

Study Objectives


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Chapter8-3

Fraud

The Sarbanes-

Oxley Act

Internal control

Principles of

internal control

Limitations

Cash equivalents

Restricted cash

Compensating

balances

Making deposits

Writing checks

Bank statements

Reconciling the

bank account

Electronic funds

transfer (EFT)

system

Cash receipts

controls

Cash

disbursements

controls

Fraud andInternal Control

Cash ControlsControl

Features: Use ofa Bank

Reporting Cash

Fraud, Internal Control, and Cash


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Chapter8-4

Dishonest act by an employee that results in personalbenefit to the employee at a cost to the employer.

Fraud and Internal Control

Fraud

SO 1 Define fraud and internal control.

Why doesfraud occur?

Illustration 8-1


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Chapter8-5


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Chapter8-6

Companiesmust

develop principles of control over financial

reporting.continually verify that controls are working.


The Sarbanes-Oxley Act

Independent auditorsmust attest to the adequacy

of internal control.

SOXcreated the Public Company AccountingOversight Board (PCAOB).



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Chapter8-7

Methods and measures adopted to:

1. Safeguard assets.

2. Enhance accuracy and reliability of accountingrecords.

3. Increase efficiency of operations, and

4. Ensure compliance with laws and regulations.



Under the Sarbanes-Oxley Act, all publicly traded U.S. corporationsare requiredto maintain an adequate system of internal control.

Internal Control


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Chapter8-8

Internal control systems have five primary components

1. A control environment

2. Risk assessment

3. Control activities

4. Information and communication

5. Monitoring



Internal Control


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Chapter8-10 SO 2 Identify the principles of internal control.

ESTABLISHMENT OF RESPONSIBILITY

Control is most effective when only one person is responsible

for a given task.SEGREGATON OF DUTIES

Related duties, including physical custody and recordkeeping, should be assigned to different individuals.

DOCUMENTATION PROCEDURES

Companies should use prenumbered documents for alldocuments should be accounted for.


Principles of Internal Control Activities


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PHYSICAL CONTROLS Illustration 8-2




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INDEPENDENT INTERNALVERIFICATION

1. Verify recordsperiodically or on asurprise basis.

2. Records verified by anemployee who is

independent.

3. Discrepancies reportedto management.


Illustration 8-3



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HUMAN RESOURCE CONTROLS

1. Bond employees.

2. Rotate employees duties andrequire vacations.

3. Conduct background checks.




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Chapter8-14


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Limitations of Internal Control

Costs should not exceed benefit.

Human element.

Size of the business.



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Chapter8-17

Q8-6. At the corner grocery store, all sales clerksmake change out of one cash register drawer. Is thisa violation of internal control? Why?

See notes page for discussion

Discussion Question

SO 3 Explain the applications of internal control principles to cash receipts.

Cash Controls


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Chapter8-18

Q8-11. The management of Sewell Company asksyou, as the company accountant, to explain (a) theconcept of reasonable assurance in internal control

and (b) the importance of the human factor ininternal control.


Discussion Question

Cash Controls



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Chapter8-19

Cash Controls

Cashconsists of coins, currency, checks, moneyorders, and money on hand or on deposit in a bank.

Cash receipts come from:

cash sales

collections on account from customers

receipt of interest, rent, and dividends

investments by owners

bank loans

proceeds from the sale of noncurrent assets



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Chapter8-20

Over-the-Counter

Receipts


Illustration 8-4


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Chapter8-21

Mail Receipts

Control Procedures:Mail receipts should be opened by two people, a listprepared, and each check endorsed.

Copy of the list, along with the checks andremittance advices, sent to cashiers department.

Cashier adds the checks to the over-the-counterreceipts and prepares a daily cash summary and

makes the daily bank deposit.

Copy of list sent to treasurers office for

comparison with total shown on daily cash summary.



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Chapter8-22

Permitting only designated personnel to handlecash receipts is an application of the principle of:

a. segregation of duties.b. establishment of responsibility.

c. independent check.

d. Human resource controls.

Review Question

Cash Controls



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Chapter8-23

Generally, internal control over cash disbursementsis more effective when companies pay by check,

rather than by cash.Applications:

Voucher system

Petty cash fund

Cash Controls

SO 4 Explain the applications of internalcontrol principles to cash disbursements.

Cash Disbursements Controls


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Chapter8-24

Cash Controls

Independent InternalVerification

Compare checks toinvoices; reconcile bank

statement monthly

Establishment ofResponsibility

Only designatedpersonnel are

authorized to signchecks (treasurer) and

approve vendors

Segregation of Duties

Different individualsapprove and makepayments; check

signers do not recorddisbursements

DocumentationProcedures

Use prenumberedchecks; checks must

have an approved

invoice; requireemployees to use

corporate credit cardsfor reimbursable

expenses

Physical ControlsStore blank checks in

safes, with limitedaccess; print check

amounts by machine inindelible ink

Illustration 8-6Cash Disbursements Controls

Human ResourceControls

Bond personnelwho handle cash;

require employeesto take vacations;

conduct backgroundchecks


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Chapter8-25

Q8-17 Joe Griswold Companys internal controls overcash disbursements provide for the treasurer to signchecks imprinted by a checkwriting machine in indelible

ink after comparing the check with the approved invoice.Identify the internal control principles that are presentin these controls.


Discussion Question

Cash Controls



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Chapter8-26

The use of prenumbered checks in disbursingcash is an application of the principle of:

a. establishment of responsibility.b. segregation of duties.

c. physical, mechanical, and electronic controls.

d. documentation procedures.

Review Question

Cash Controls



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Chapter8-27

Voucher System

Network of approvals, by authorized

individuals, to ensure all disbursements bycheck are proper.

A voucheris an authorization form prepared

for each expenditure.

Cash Controls




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Chapter8-28

Petty Cash Fund- Used to pay small amounts.

Involves:

1. establishing the fund,

2. making payments from the fund, and

3. replenishing the fund.

Cash Controls

SO 5 Describe the operation of a petty cash fund.



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Chapter8-29

Illustration: If Laird Company decides to establish a $100fund on March 1, the journal entry is:

Cash Controls


Petty cash 100Mar. 1

Cash 100


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Chapter8-30

Illustration: Assume that on March 15 Lairds petty cashcustodian requests a check for $87. The fund contains $13cash and petty cash receipts for postage $44, freight-out $38,and miscellaneous expenses $5. The general journal entry to

record the check is:

Cash Controls


Postage expense 44Mar. 15

Cash 87

Freight-out 38

Miscellaneous expense 5


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Chapter8-31

Illustration: Occasionally, the company may need to recognizea cash shortage or overage. Assume that Lairds petty cash

custodian has only $12 in cash in the fund plus the receipts aslisted. The request for reimbursement would, therefore, be for

$88, and Laird would make the following entry:

Cash Controls


Postage expense 44Mar. 15

Cash 88

Freight-out 38

Miscellaneous expense 5Cash over and short 1


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Chapter8-32

Contributes to good internal control over cash.

Minimizes the amount of currency on hand.

Creates a double record of bank transactions.

Bank reconciliation.

Control Features: Use of a Bank

SO 6 Indicate the control features of a bank account.


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Chapter8-34

Writing ChecksWritten order signed by depositor directing bank to paya specified sum of money to a designated recipient.


Maker

Payee

Illustration 8-9

Payer



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Chapter8-35

Bank StatementsDebitMemorandum

Bank service charge

NSF (not sufficientfunds)


Illustration 8-10

CreditMemorandum

Collect notesreceivable.

Interest earned.



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Chapter8-36

The control features of a bank account do notinclude:

a. having bank auditors verify the correctness ofthe bank balance per books.

b. minimizing the amount of cash that must be kepton hand.

c. providing a double record of all banktransactions.

d. safeguarding cash by using a bank as adepository.

Review Question




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Chapter8-37

Reconciling the Bank Account

SO 7 Prepare a bank reconciliation.

Reconcile balance per books and balance per bank totheir adjusted (corrected) cash balances.

Reconciling Items:

1. Deposits in transit.

2. Outstanding checks.

3. Errors.

4. Bank memoranda.



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Chapter8-38

Reconciliation Procedures


+ Deposit in Transit

- Outstanding Checks

+- Bank Errors

+ Notes collected by bank

- NSF (bounced) checks

- Check printing or otherservice charges

+- Company Errors

CORRECT BALANCE CORRECT BALANCE

Illustration 8-11



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Chapter8-39

Illustration: The bank statement for Laird Company (Illustration8-10), shows a balance per bank of $15,907.45 on April 30, 2010.On this date the balance of cash per books is $11,589.45. Usingthe four reconciliation steps, Laird determines the followingreconciling items.



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Chapter8-40

Illustration: a) Prepare a bank reconciliation at April 30.


Cash balance per bank statement $15,907.45

Add: Deposit in transit 2,201.40

Less: Outstanding checks (5,904.00)

Adjusted cash balance per bank $12,204.85

Cash balance per books $11,589.45

Collection of notes + interest - fee 1,035.00

Add: Error in recording check no. 443 36.00

Less: NSF check (425.60)

Bank service charge (30.00)

Adjusted cash balance per books $12,204.85


Illustration 8-12


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Chapter8-41

The company records each reconciling item used to determinethe adjusted cash balance per books.

Collection of Note Receivable: Assuming interest of $50 hasnot been accrued and collection fee is charged to

Miscellaneous Expense, the entry is:


Cash 1,035.00Apr. 30

Miscellaneous expense 15.00

Notes receivable 1,000.00Interest revenue 50.00



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Chapter8-42

Book Error: The cash disbursements journal shows thatcheck no. 443 was a payment on account to Andrea Company,a supplier. The correcting entry is:


Cash 36.00Apr. 30Accounts payable 36.00



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Chapter8-43

NSF Check: As indicated earlier, an NSF check becomes anaccount receivable to the depositor. The entry is:


Accounts receivable 425.60Apr. 30

Cash 425.60

Bank Service Charges: Depositors debit check printingcharges (DM) and other bank service charges (SC) to

Miscellaneous Expense. The entry is:

Miscellaneous 30.00Apr. 30

Cash 30.00



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Chapter8-44

The reconciling item in a bank reconciliation thatwill result in an adjusting entry by the depositoris:

a. outstanding checks.

b. deposit in transit.

c. a bank error.

d. bank service charges.

Review Question




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Chapter8-45

Electronic Funds Transfers (EFT)

Disbursement systems that uses wire,telephone, or computers to transfer cash

balances between locations.EFT transfers normally result in betterinternal control since no cash or checks arehandled by company employees.




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Chapter

8-46

Q8-23. Lori Figgs is confused about the lack ofagreement between the cash balance per books and thebalance per the bank. Explain the causes for the lack of

agreement to Lori, and give an example of each cause.


Discussion Question




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Chapter

8-48

Which of the following statements correctlydescribes the reporting of cash?

a. Cash cannot be combined with cash equivalents.b. Restricted cash funds may be combined with

Cash.

c. Cash is listed first in the current assets

section.d. Restricted cash funds cannot be reported as a

current asset.

Review Question

Reporting Cash

SO 8 Explain the reporting of cash.


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Chapter

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