CH-7 PPT - 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 Fraud, Internal Control, and 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 7-2 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 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 7-3 SO 1 Define fraud and internal control. Slide 7-4 Fraud and Internal Control 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 7-5 SO 1 Define fraud and internal control. 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. Und e r th e S a rb a ne s ­O xle y Ac t, a ll p ub lic ly tra d e d U.S . c o rp o ra tio ns a re required to m a inta in a n a d e q ua te s y s te m o f inte rna l c o ntro l. Slide 7-6 SO 1 Define fraud and internal control. 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 7-7 SO 1 Define fraud and internal control. 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 o f c o ntro ls a c tivitie s : Slide 7-8 Es ta b lis h m e nt o f re s p o ns ib ility S e g re g a tio n o f d utie s Do c um e nta tio n p ro c e d ure s P h y s ic a l c o ntro ls Ind e p e nd e nt inte rna l ve rific a tio n Hum a n re s o urc e c o ntro ls SO 2 Identify the principles of internal control. Fraud and Internal Control Fraud and Internal Control Principles of Internal Control Activities ESTABLISHMENT OF RESPONSIBILITY C o ntro l is m o s t e ffe c tive wh e n o nly o ne p e rs o n is re s p o ns ib le fo r a g ive n ta s k. SEGREGATON OF DUTIES R e la te d d utie s , inc lud ing p h y s ic a l c us to d y a nd re c o rd ke e p ing , s h o uld b e a s s ig ne d to d iffe re nt ind ivid ua ls . DOCUMENTATION PROCEDURES C o m p a nie s s h o uld us e p re num b e re d d o c um e nts fo r a ll d o c um e nts s h o uld b e a c c o unte d fo r. Slide 7-9 SO 2 Identify the principles of internal control. Fraud and Internal Control Fraud and Internal Control Slide 7-10 SO 2 Fraud and Internal Control Fraud and Internal Control Slide 7-11 SO 2 Identify the principles of internal control. Fraud and Internal Control Fraud and Internal Control Slide 7-12 SO 2 Fraud and Internal Control Fraud and Internal Control Principles of Internal Control Activities PHYSICAL CONTROLS Slide 7-13 Illustration 7-2 SO 2 Identify the principles of internal control. Fraud and Internal Control Fraud and Internal Control Principles of Internal Control Activities Illustration 7-3 INDEPENDENT INTERNAL VERIFICATION 1. Ve rify re c o rd s p e rio d ic a lly o r o n a s urp ris e b a s is . 2. R e c o rd s ve rifie d b y a n e m p lo y e e wh o is ind e p e nd e nt. 3. Discrepancies reported to management. Slide 7-14 SO 2 Identify the principles of internal control. Fraud and 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 7-15 SO 2 Identify the principles of internal control. Fraud Fraud Fraud Fraud and and IInternal nternal Control Control Control Control Slide 7-16 SO 2 Fraud and Internal Control Fraud and Internal Control Slide 7-17 SO 2 Fraud and Internal Control Fraud and Internal Control Slide 7-18 SO 2 Fraud and Internal Control Fraud and Internal Control Limitations of Internal Control Costs should not exceed benefit. Human element. Size of the business. Slide 7-19 SO 2 Identify the principles of internal control. Cash Receipts Controls 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 7-20 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 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 7-21 SO 3 Explain the applications of internal control principles to cash receipts. Over-theCounter Receipts Illustration 7-5 Slide 7-22 SO 3 Explain the applications of internal control principles to cash receipts. Cash Receipts Controls 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 7-23 SO 3 Explain the applications of internal control principles to cash receipts. Cash Receipts Controls Cash Receipts Controls Review Question Permitting only designated personnel to handle cash receipts is an application of the principle of: a. segregation of duties. b. establishment of responsibility. c. independent check. d. Human resource controls. Slide 7-24 SO 3 Explain the applications of internal control principles to cash receipts. Cash Disbursement Controls 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 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 Cash Disbursement Controls Review Question The use of prenumbered checks in disbursing cash is an application of the principle of: a. establishment of responsibility. b. segregation of duties. c. physical, mechanical, and electronic controls. d. documentation procedures. Slide 7-27 SO 4 Explain the applications of internal control SO principles to cash disbursements. principles Cash Disbursement Controls 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 7-28 SO 4 Explain the applications of internal control SO principles to cash disbursements. principles Cash Disbursement Controls 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 7-29 SO 5 Describe the operation of a petty cash fund. Cash Disbursement Controls Cash Disbursement Controls E7-8: Linc o lnville C o m p a ny us e s a n im p re s t p e tty c a s h s y s te m . T h e fund wa s e s ta b lis h e d o n Ma rc h 1 with a b a la nc e o f $ 1 0 0 . During Ma rc h th e fo llo wing p e tty c a s h re c e ip ts we re fo und in th e p e tty c a s h b o x. March 5 Stamp inventory $39 March 7 Freight­out 21 March 9 Miscellaneous expense March 11 Travel expense 24 March 14 Miscellaneous expense 5 6 The fund was replenished on March 15 when the fund contained $3 in cash. On March 20, the amount in the fund was increased to $150. Instructions: J o urna lize th e e ntrie s in Ma rc h th a t p e rta in to th e o p e ra tio n o f th e p e tty c a s h fund . Slide 7-30 SO 5 Describe the operation of a petty cash fund. Cash Disbursement Controls Cash Disbursement Controls E7-8: The fund was established on March 1 with a balance of $100. March 1 Slide 7-31 Petty cash Cash 100 100 SO 5 Describe the operation of a petty cash fund. Cash Disbursement Controls Cash Disbursement Controls E7-8: The fund was replenished on March 15 when the fund contained $3 E7-8: in cash. March 15 39 21 Miscellaneous expense Travel expense Cash over and short Cash Slide 7-32 Postage expense Freight­out 11 24 2 97 SO 5 Describe the operation of a petty cash fund. Cash Disbursement Controls Cash Disbursement Controls E7-8: On March 20, the amount in the fund was increased to $150. E7-8: March 20 Slide 7-33 Petty cash Cash 50 50 SO 5 Describe the operation of a petty cash fund. Control Features: Use of a Bank 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 7-34 SO 6 Indicate the control features of a bank account. Control Features: Use of a Bank Control Features: Use of a Bank Making Bank Deposits Authorized employee should make deposit. Front Side Slide 7-35 Illustration 7-8 Bank Code Numbers Reverse Side SO 6 Indicate the control features of a bank account. Control Features: Use of a Bank 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 7-36 SO 6 Indicate the control features of a bank account. Control Features: Use of a Bank 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 7-37 SO 6 Indicate the control features of a bank account. Control Features: Use of a Bank Control Features: Use of a Bank Review Question The control features of a bank account do not include: a. having bank auditors verify the correctness of the bank balance per books. b. minimizing the amount of cash that must be kept on hand. c. providing a double record of all bank transactions. d. safeguarding cash by using a bank as a depository. Slide 7-38 SO 6 Indicate the control features of a bank account. Control Features: Use of a Bank 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 7-39 SO 7 Prepare a bank reconciliation. Control Features: Use of a Bank 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 7-40 CORRECT BALANCE SO 7 Prepare a bank reconciliation. Control Features: Use of a Bank Control Features: Use of a Bank E7-11: T h e fo llo wing info rm a tio n p e rta ins to Fa m ily Vid e o C o m p a ny . 1. Cash balance per bank, July 31, $7,263. 2. Cash balance per books, July 31, $7,284. 3. July bank service charge not recorded by the depositor $28. 4. Deposits in transit, July 31, $1,500. 5. Bank collected $900 note for Family in July, plus interest $36, less fee $20.The collection has not been recorded by Family, and no interest has been accrued. 6. Outstanding checks, July 31, $591. Instructions a) b) Slide 7-41 P re p a re a b a nk re c o nc ilia tio n a t July 3 1 . J o urna lize th e a d jus ting e ntrie s a t July 3 1 o n th e b o o ks o f Fa m ily Vid e o C o m p a ny. SO 7 Prepare a bank reconciliation. Control Features: Use of a Bank Control Features: Use of a Bank E7-11: a) Prepare a bank reconciliation at July 31. E7-11: Cash balance per bank statement $7,263 1,500 (591) $8,172 Add: Deposit in transit Less: Outstanding checks Adjusted cash balance per bank Cash balance per books Add: Collection of notes receivable Collection of interest Less: Bank service charge Note collection fee Adjusted cash balance per books Slide 7-42 $7,284 900 36 (28) (20) $8,172 SO 7 Prepare a bank reconciliation. Control Features: Use of a Bank Control Features: Use of a Bank E7-11: b) Journalize the adjusting entries at July 31 on the books of E7-11: Family Video Company. Dr. Cr. July 31 Miscellaneous expense 28 July 31 Cash 28 Cash 916 Miscellaneous expense 20 Interest revenue Notes receivable 900 36 Note: Adjusting journal entry includes only the adjustments to the cash Note: balance per books. Slide 7-43 SO 7 Prepare a bank reconciliation. Control Features: Use of a Bank Control Features: Use of a Bank Review Question The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is: a. outstanding checks. b. deposit in transit. c. a bank error. d. bank service charges. Slide 7-44 SO 7 Prepare a bank reconciliation. Control Features: Use of a Bank Control Features: Use of a Bank Electronic Funds Transfers (EFT) System Disbursement systems that uses wire, telephone, or computers to transfer cash balances between locations. EFT transfers normally result in better internal control since no cash or checks are handled by company employees. Slide 7-45 SO 7 Prepare a bank reconciliation. Reporting Cash 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 7-46 SO 8 Explain the reporting of cash. Reporting Cash Reporting Cash Review Question Which of the following statements correctly describes 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. Slide 7-47 SO 8 Explain the reporting of cash. ...
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