powerpoints - Chapter 7 Fraud, Internal Control, and Cash...

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Unformatted text preview: Chapter 7 Fraud, Internal Control, and Cash Financial Accounting, Seventh Edition Slide 7 -1 Study Objectives 1. 2. Identify the principles of internal control. 3. Explain the applications of internal control principles to cash receipts. 4. Explain the applications of internal control principles to 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. Slide 7 -2 Define fraud and internal control. Explain the reporting of cash. Fraud, Internal Control, and Cash Fraud and Fraud Internal Control Control Fraud The SarbanesOxley Act Internal control Principles of Principles internal control activities activities Limitations Slide 7 -3 Cash Receipts Cash Controls Controls Over-thecounter counter receipts Mail receipts Mail Cash Cash Disbursement Controls Controls Voucher Voucher system controls controls Petty cash Petty fund controls fund Control Control Features: Use of a Bank of Making Making deposits deposits Writing checks Bank Bank statements statements Reconciling Reconciling the bank account account Electronic Electronic funds transfer (EFT) system (EFT) Reporting Reporting Cash Cash Cash Cash equivalents equivalents Restricted Restricted cash cash Compensating Compensating balances balances Fraud and Internal Control Fraud Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. Illustration 7-1 Why does fraud occur? Slide 7 -4 SO 1 Define fraud and internal control. Slide 7 -5 Fraud and Internal Control The Sarbanes-Oxley Act Companies must develop principles of control over financial reporting. continually verify that controls are working. Independent auditors must attest to the adequacy of internal control. SOX created the Public Company Accounting Oversight Board (PCAOB). Slide 7 -6 SO 1 Define fraud and internal control. Fraud and Internal Control Internal Control Methods and measures adopted to: 1. Safeguard assets. 2. Enhance accuracy and reliability of accounting records. 3. Increase efficiency of operations, and 4. Ensure compliance with laws and regulations. Under the Sarbanes­Oxley Act, all publicly traded U.S. corporations are required to maintain an adequate system of internal control. Slide 7 -7 SO 1 Define fraud and internal control. Fraud and Internal Control Internal Control Internal control systems have five primary components 1. A control environment 2. Risk assessment 3. Control activities 4. Information and communication 5. Monitoring Slide 7 -8 SO 1 Define fraud and internal control. Fraud and Internal Control Principles of Internal Control Activities Measures vary with management’s assessment of the risks faced. size and nature of the company. Six principles of controls activities: Slide 7 -9 Establishment of responsibility Segregation of duties Documentation procedures Physical controls Independent internal verification Human resource controls SO 2 Identify the principles of internal control. Fraud and Internal Control Principles of Internal Control Activities 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 record keeping, should be assigned to different individuals. DOCUMENTATION PROCEDURES Companies should use prenumbered documents for all documents should be accounted for. Slide 7-10 SO 2 Identify the principles of internal control. Fraud and Internal Control Slide 7-11 SO 2 Fraud and Internal Control Slide 7-12 SO 2 Identify the principles of internal control. Fraud and Internal Control Slide 7-13 SO 2 Fraud and Internal Control Principles of Internal Control Activities PHYSICAL CONTROLS Slide 7-14 Illustration 7-2 SO 2 Identify the principles of internal control. Fraud and Internal Control Principles of Internal Control Activities Illustration 7-3 INDEPENDENT INTERNAL VERIFICATION 1. Verify records periodically or on a surprise basis. 2. Records verified by an employee who is independent. 1. Discrepancies reported to management. Slide 7-15 SO 2 Identify the principles of internal control. Fraud and Internal Control Principles of Internal Control Activities HUMAN RESOURCE CONTROLS 1. Bond employees. 2. Rotate employees’ duties and require vacations. 3. Conduct background checks. Slide 7-16 SO 2 Identify the principles of internal control. Fraud Fraud and Internal Control Control Slide 7-17 SO 2 Fraud and Internal Control Slide 7-18 SO 2 Fraud and Internal Control Slide 7-19 SO 2 Fraud and Internal Control Limitations of Internal Control Costs should not exceed benefit. Human element. Size of the business. Slide 7-20 SO 2 Identify the principles of internal control. Cash Receipts Controls Over-the-Counter Receipts Illustration 7-4 Establishment of Responsibility Independent Internal Verification Only designated personnel are authorized to handle cash receipts (cashiers) Use remittance advice (mail receipts), cash register tapes, and deposit slips Supervisors count cash receipts daily; treasurer compares total receipts to bank deposits daily Segregation of Duties Physical Controls Different individuals receive cash, record cash receipts, and hold the cash Slide 7-21 Documentation Procedures Store cash in safes and bank vaults; limit access to storage areas; use cash registers Human Resource Controls Bond personnel who handle cash; require employees to take vacations; deposit all cash in bank daily SO 3 Explain the applications of internal control principles to cash receipts. Cash Receipts Controls Cash consists of coins, currency, checks, money orders, 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 Slide 7-22 SO 3 Explain the applications of internal control principles to cash receipts. Over-theCounter Receipts Illustration 7-5 Slide 7-23 SO 3 Explain the applications of internal control principles to cash receipts. Cash Receipts Controls Mail Receipts Mail receipts should be opened by two people, a list prepared, and each check endorsed. Copy of the list, along with the checks and remittance advices, sent to cashier’s department. Cashier adds the checks to the over­the­counter receipts and prepares a daily cash summary and makes the daily bank deposit. Copy of list sent to treasurer’s office for comparison with total shown on daily cash summary. Slide 7-24 SO 3 Explain the applications of internal control principles to cash receipts. Cash Disbursement Controls Generally, internal control over cash disbursements is more effective when companies pay by check, rather than by cash. Applications: Voucher system Petty cash fund Slide 7-25 SO 4 Explain the applications of internal control SO principles to cash disbursements. principles Cash Disbursement Controls Illustration 7-6 Establishment of Responsibility Only designated personnel are authorized to sign checks (treasurer) and approve vendors Documentation Procedures Use prenumbered checks; checks must have an approved invoice; require employees to use corporate credit cards for reimbursable expenses Segregation of Duties Different individuals approve and make payments; check signers do not record disbursements Slide 7-26 Physical Controls Store blank checks in safes, with limited access; print check amounts by machine in indelible ink Independent Internal Verification Compare checks to invoices; reconcile bank statement monthly Human Resource Controls Bond personnel who handle cash; require employees to take vacations; conduct background checks Cash Disbursement Controls Voucher System Controls Voucher System Network of approvals, by authorized individuals, to ensure all disbursements by check are proper. A voucher is an authorization form prepared for each expenditure. Slide 7-27 SO 4 Explain the applications of internal control SO principles to cash disbursements. principles Cash Disbursement Controls Petty Cash Fund Controls Petty Cash Fund ­ Used to pay small amounts. Involves: 1. establishing the fund, 2. making payments from the fund, and 3. replenishing the fund. Slide 7-28 SO 5 Describe the operation of a petty cash fund. Cash Disbursement Controls Illustration: If Laird Company decides to establish a $100 fund on March 1, the journal entry is: Mar. 1 Petty cash Cash Slide 7-29 100 100 SO 5 Describe the operation of a petty cash fund. Cash Disbursement Controls Illustration: Assume that on March 15 Laird’s petty cash custodian requests a check for $87. The fund contains $13 cash and petty cash receipts for postage $44, freight­out $38, and miscellaneous expenses $5. The general journal entry to record the check is: Mar. 15 Postage expense 44 Freight­out 38 Miscellaneous expense Cash Slide 7-30 5 87 SO 5 Describe the operation of a petty cash fund. Cash Disbursement Controls Illustration: Occasionally, the company may need to recognize a cash shortage or overage. Assume that Laird’s petty cash custodian has only $12 in cash in the fund plus the receipts as listed. The request for reimbursement would, therefore, be for $88, and Laird would make the following entry: Mar. 15 Postage expense 44 Freight­out 38 Miscellaneous expense 5 Cash over and short 1 Cash Slide 7-31 88 SO 5 Describe the operation of a petty cash fund. Control Features: Use of a Bank Contributes to good internal control over cash. Minimizes the amount of currency on hand. Creates a double record of bank transactions. Bank reconciliation. Slide 7-32 SO 6 Indicate the control features of a bank account. Control Features: Use of a Bank Making Bank Deposits Authorized employee should make deposit. Front Side Slide 7-33 Illustration 7-8 Bank Code Numbers Reverse Side SO 6 Indicate the control features of a bank account. Control Features: Use of a Bank Writing Checks Written order signed by depositor directing bank to pay a specified sum of money to a designated recipient. Illustration 7-9 Maker Payee Payer Slide 7-34 SO 6 Indicate the control features of a bank account. Control Features: Use of a Bank Illustration 7-10 Bank Statements Debit Memorandum Bank service charge NSF (not sufficient funds) Credit Memorandum Collect notes receivable. Interest earned. Slide 7-35 SO 6 Indicate the control features of a bank account. Control Features: Use of a Bank Reconciling the Bank Account Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances. Reconciling Items: 1. Deposits in transit. 2. Outstanding checks. 3. Errors. 4. Bank memoranda. Slide 7-36 SO 7 Prepare a bank reconciliation. Control Features: Use of a Bank Reconciliation Procedures Illustration 7-11 + Deposit in Transit + Notes collected by bank - - NSF (bounced) checks - Check printing or other service charges Outstanding Checks +- Bank Errors +- Company Errors CORRECT BALANCE Slide 7-37 CORRECT BALANCE SO 7 Prepare a bank reconciliation. Control Features: Use of a Bank Illustration: The bank statement for Laird Company (Illustration 7­12), shows a Illustration: balance per bank of $15,907.45 on April 30, 2011. On this date the balance of cash per books is $11,589.45. Using the four reconciliation steps, Laird determines the following reconciling items. Slide 7-38 Control Features: Use of a Bank Illustration: a) Prepare a bank reconciliation at April 30. Illustration: Cash balance per bank statement Add: $15,907.45 Deposit in transit 2,201.40 Less: Outstanding checks Adjusted cash balance per bank (5,904.00) $12,204.85 Cash balance per books $11,589.45 Add: Error in recording check no. 443 Collection of notes + interest - fee Less: NSF check Bank service charge Adjusted cash balance per books Slide 7-39 Illustration 7-12 36.00 1,035.00 (425.60) (30.00) $12,204.85 SO 7 Prepare a bank reconciliation. Reporting Cash Cash consists of coins, currency (paper money), checks, money orders, and money on hand or on deposit in a bank or similar depository. Illustration 7-14 Cash equivalents Restricted cash Compensating balances Slide 7-40 SO 8 Explain the reporting of cash. ...
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This note was uploaded on 09/09/2011 for the course ACCT 100 taught by Professor Ftom during the Spring '08 term at S.F. State.

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