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.f''N wm team for success H \ ffh - l ( X ^ f\ ' : t( M I ^ a 1' W '::% ACCOUNTING mmA ACCOUNT CLASSIFICATION AND PRESENTATION F in a n c ia l S ta t e m e n t N o rm a l B a la n c e Current Liability Balance Sheet Credit Accounts Receivable Current Asset Balance Sheet Debit Accumulated Depreciation—Buildings Plant Asset—Contra Balance Sheet Credit Accumulated Depreciation—Equipment Plant Asset—Contra Balance Sheet Credit Advertising Expense Operating Expense Income Statement Debit Allowance for Doubtful Accounts Current Asset—Contra Balance Sheet Credit Amortization Expense Operating Expense Income Statement Debit Bad Debt Expense B Operating Expense Income Statem ent Debit Bonds Payable Long-Term Liability Balance Sheet Credit Buildings Plant Asset Balance Sheet Debit A c c o u n t T itle C la s s ific a tio n Accounts Payable A 1 c Cash Current Asset Balance Sheet Debit Common Stock Stockholders’ Equity Balance Sheet Credit Copyrights Intangible Asset Balance Sheet Debit Cost of Goods Sold Cost of Goods Sold Income Statement Debit D Current Asset/Long-Term Investment Balance Sheet Debit Debt Investments Depreciation Expense Operating Expense Income Statement Debit Discount on Bonds Payable Dividends Long-Term Liability—Contra Balance Sheet Temporary account closed Retained Earnings to Retained Earnings Statement Debit Debit Dividends Payable Current Liability Credit 1Equipment Plant Asset 1Freight-Out F 1Operating Expense Gain on Disposal of Plant Assets Balance Sheet E n 1Balance Sheet 1Income Statem ent | Debit | Debit 1 G \ Other Income Income Statement Credit Goodwill Intangible Asset Balance Sheet Debit Income Summary I Temporary account closed to Retained Earnings Not Applicable (1) r Income Tax Expense Income Tax Expense Income Statement Debit Income Taxes Payable Current Liability Balance Sheet Credit Insurance Expense Operating Expense Income Statement Debit Interest Expense Other Expense Income Statement Debit Interest Payable Current Liability Balance Sheet Credit Interest Recei\able C unent Asset Balance Sheet Debit Interest Revenue Other Income Income Statement Credit Inventory Current Asset Balance Sheet (2) Debit F in a n c ia l S ta t e m e n t N o rm a l B a la n c e Plant Asset Balance Sheet Debit Other Expense Income Statement Debit A c c o u n t T itle C la s s ífíc a tio n Land Loss on Disposal of Plant Assets L M M aintenance and Repairs Expense Operating Expense Income Statement Debit Mortgage Payable Long-Term Liability Balance Sheet Credit Notes Payable N Current Liability/ Long-Term Liability Balance Sheet Credit Owner's Equity and Balance Sheet Owner’s Equity Credit Owner’s Capital O Owner’s Equity Debit Owner’s Drawings Temporary account closed to Owner’s Capital Patents Intangible Asset Stockholders’ Equity Balance Sheet Balance Sheet Debit Credit Stockholders’ Equity Balance Sheet Credit P Paid-in Capital in Excess of Par— Common Stock Paid-in Capital in Excess of Par— Preferred Stock Preferred Stock Stockholders’ Equity Balance Sheet Credit Premium on Bonds Payable Long-Term Liability Balance Sheet Credit Prepaid Insurance Current Asset Balance Sheet Debit Prepaid Rent Current Asset Balance Sheet Debit Rent Expense Retained Earnings R Operating Expense Stockholders’ Equity Income Statement Balance Sheet and Retained Earnings Statement Debit Credit Salaries and Wages Expense Operating Expense Income Statement Debit Salaries and Wages Payable Current Liability Balance Sheet Credit Sales Discounts Revenue—Contra Income Statement Debit S Sales Returns and Allowances Revenue—Contra Income Statement Debit Sales Revenue Revenue Income Statement Credit Selling Expenses Operating Expense Income Statement Debit Service Revenue Revenue Income Statement Credit Stock Investments Balance Sheet Debit Supplies Current Asset/Long-Term Investment Current Asset Balance Sheet Debit Supplies Expense Operating Expense Income Statement Debit T Treasury Stock 1Stockholders' Equity—Contra 1Balance Sheet Debit U Current Liability Balance Sheet Credit Operating Expense Income Statement Utilities Expense Debit (1) The normal balance for Income Summaiy will be credil when ihere is a net income, debit when there is a net loss The Income SummafV' account does noi appear on any financial statement (2) If a periodic system is used, Inventoi-y also appears on the income statement in the calculation of cost of goods sold Unearned Serv ice Revenue ACCOUNT CLASSIFICATION AND PRESENTATION A c c o u n t T itle C la s s ific a tio n F in a n c ia l S ta t e m e n t N o rm al B a la n c e Accounts Payable Current Liability Balance Sheet Credit Accounts Receivable Current Asset Balance Sheet Debit Accumulated Depreciation—Buildings Plant Asset—Contra Balance Sheet Credit Accumulated Depreciation—Equipment Plant Asset—Contra Balance Sheet Credit Advertising Expense Operating Expense Incom e Statem ent Debit Allowance for Doubtful Accounts Current Asset—Contra Balance Sheet Credit Amortization Expense O perating Expense Income Statem ent Debit Bad Debt Expense B Operating Expense Income Statem ent Debit Bonds Payable Long-Term Liability Balance Sheet Credit Buildings Plant Asset Balance Sheet Debit Cash Current Asset Balance Sheet Debit Credit 1 Common Stock Stockholders’ Equity Balance Sheet Copyrights Intangible Asset Balance Sheet Debit Cost of Goods Sold Cost of Goods Sold Income Statement Debit D Current Asset/Long-Term Investment Balance Sheet Debit Debt Investments Depreciation Expense O perating Expense Income Statement Debit Discount on Bonds Payable Dividends Long-Term Liability—Contra Temporary account closed to Retained Earnings Balance Sheet Retained Earnings Statement Debit Debit Dividends Payable Current Liability Balance Sheet Credit [ Balance Sheet | Debit 1Equipment Plant Asset F 1O perating Expense 1Freight-Out n E Income Statem ent | Debit Other Income Income Statement Credit Goodwill Intangible Asset Balance Sheet Debit I Temporary account closed to Retained Earnings Not Applicable (1) Income Summary 1 G Gain on Disposal of Plant Assets 1 1 Income Tax Expense Income Tax Expense Income Statem ent Debit Income Taxes Payable Current Liability Balance Sheet Credit Insurance Expense Operating Expense Income Statement Debit Interest Expense Other Expense Income Statement Debit Interest Payable Current Liability Balance Sheet Credit Interest Receivable Current Asset Balance Sheet Debit Inteiest Revenue Other Income Income Statement Credit Inventory Current Asset Balance Sheet (2) Debit F in a n c ia l S ta t e m e n t N o rm a l B a la n c e A c c o u n t T itle C la s s ific a tio n Land Plant Asset Balance Sheet Debit Loss on Disposal of Plant Assets Other Expense Income Statement Debit M aintenance and Repairs Expense Operating Expense Income Statement Debit Mortgage Payable Long-Term Liability Balance Sheet Credit Notes Payable N Current Liability/ Long-Term Liability Balance Sheet Credit Owner's Equity and Balance Sheet Owner's Equity Credit P Intangible Asset Stockholders’ Equity Balance Sheet Balance Sheet Debit Credit Paid-in Capital in Excess of Par— Preferred Stock Stockholders’ Equity Balance Sheet Credit Preferred Stock Stockholders' Equity Balance Sheet Credit Premium on Bonds Payable Long-Term Liability Balance Sheet Credit Prepaid Insurance Current Asset Balance Sheet Debit Prepaid Rent Current Asset Balance Sheet Debit Rent Expense Retained Earnings R Operating Expense Stockholders’ Equity Income Statement Balance Sheet and Retained Earnings Statement Debit Credit Salaries and Wages Expense S Operating Expense Income Statement Debit Salaries and Wages Payable Current Liability Balance Sheet Credit Debit L M Owner's Capital Owner's Drawings Patents Paid-in Capital in Excess of Par— Common Stock O Owner’s Equity Temporary account closed to Owner’s Capital Debit Sales Discounts Revenue—Contra Income Statement Sales Returns and Allowances Revenue—Contra Income Statement Debit Sales Revenue Revenue Income Statement Credit Selling Expenses Operating Expense Income Statement Debit Service Revenue Revenue Income Statement Credit Stock Investments Current Asset/Long-Term Investment Balance Sheet Debit Supplies Current Asset Balance Sheet Debit Supplies Expense Operating Expense Income Statement Debit T Treasury Stock 1Stockholders' Equity—Contra I Balance Sheet Debit U Current Liability Balance Sheet Credit Operating Expense Utilities Expense Income Statement Debit (1) The normal balance for Income Summary’ will be credit when there is a nei income, debit u hen there is a net loss The Income Summary account does not appear on any financial statement (2) If a periodic system is used Inventory also appears on the income statemenl in ihe calculation of cost of goods sold Unearned Service Revenue ACCOUNT CLASSIFICATION AND PRESENTATION A c c o u n t T itle C la s s íf íc a tio n F in a n c ia l S ta t e m e n t N o rm al B a la n c e Accounts Payable Current Liability Balance Sheet Credit Accounts Receivable Current Asset Balance Sheet Debit Accumulated Depreciation—Buildings Plant Asset—Contra Balance Sheet Credit Accumulated Depreciation—Equipment Plant Asset—Contra Balance Sheet Credit Advertising Expense O perating Expense Income Statement Debit Allowance for Doubtful Accounts Current Asset—Contra Balance Sheet Credit Amortization Expense O perating Expense Incom e Statem ent Debit Incom e Statem ent Debit B Bad Debt Expense O perating Expense Bonds Payable Long-Term Liability Balance Sheet Credit Buildings Plant Asset Balance Sheet Debit c Cash Current Asset Balance Sheet Debit Common Stock Stockholders’ Equity Balance Sheet Credit Copyrights Intangible Asset Balance Sheet Debit Cost of Goods Sold Cost of Goods Sold Income Statement Debit Debt Investments D Current Asset/Long-Term Investment Balance Sheet Debit Depreciation Expense O perating Expense Income Statement Debit Discount on Bonds Payable Dividends Long-Term Liability—Contra Temporary account closed to Retained Earnings Balance Sheet Retained Earnings Statement Debit Debit Dividends Payable Current Liability Balance Sheet Credit | Balance Sheet Debit | Income Statement Debit 1 E [ Equipm ent |I Plant Asset 1 F Freight-Oul Operating Expense G Other Income Income Statement Credit Goodwill Intangible Asset Balance Sheet Debit Income Summary Temporary account closed to Retained Earnings Not Applicable (1) Income Tax Expense Income Statement Debit Current Liability Balance Sheet Credil Income Statement Debit Income Tax Expense Income Taxes Payable Insurance Expense 1O perating Expense Interest Expense 1 Gain on Disposal of Plant Assets 1 Other Expense Income Statement Debit Interest Payable Current Liability Balance Sheet Credit Interest Receivable Current Asset Balance Sheet Debit Interest Revenue Other Income Income Statement Credit InventoiA Current Asset Balance Sheet (2) Debit F in a n c ia l S ta t e m e n t N o rm a l B a la n c e A c c o u n t T itle C la s s if ic a tio n Land Plant Asset Balance Sheet Debit Loss on Disposal of Plant Assets Other Expense Income Statement Debit Maintenance and Repairs Expense Operating Expense Income Statement Debit Mortgage Payable Long-Term Liability Balance Sheet Credit Notes Payable N Current Liability/ Long-Term Liability Balance Sheet Credit Owner’s Equity and Balance Sheet Owner’s Equity Credit Debit L M Owner’s Capital O Owner’s Equity Owner’s Drawings Temporary account closed to Owner’s Capital Patents Intangible Asset Stockholders’ Equity Balance Sheet Balance Sheet Debit Credit Paid-in Capital in Excess of P a r Preferred Stock Stockholders’ Equity Balance Sheet Credit Preferred Stock Stockholders’ Equity Balance Sheet Credit Premium on Bonds Payable Long-Term Liability Balance Sheet Credit Prepaid Insurance Current Asset Balance Sheet Debit Prepaid Rent Current Asset Balance Sheet Debit Rent Expense Retained Earnings R Operating Expense Stockholders' Equity Income Statement Balance Sheet and Retained Earnings Statement Debit Credit Salaries and Wages Expense S Operating Expense Income Statement Debit Salaries and Wages Payable Current Liability Balance Sheet Credit Sales Discounts Revenue—Contra Income Statement Debit Sales Returns and Allowances Revenue—Contra Income Statement Debit P Paid-in Capital in Excess of P a r Common Stock Sales Revenue Revenue Income Statement Credit Selling Expenses Operating Expense Income Statement Debit Service Revenue Revenue Income Statement Credit Stock Investments Current Asset/Long-Term Investment Balance Sheet Debit Supplies Current Asset Balance Sheet Debit Supplies Expense Operating Expense Income Statement Debit T Treasury Stock 1Stockholders’ Equity—Contra ] Balance Sheet Debit U Unearned Service Revenue Current Liability Utilities Expense Operating Expense Balance Sheet Credit Income Statement Debit (1) The normal balance for Income Summary will be credit when there is a net income, debit when there is a net loss The income Summary account does not appear on any financial statement, (2) If a periodic system is used Inventory also appears on the income statement in the calculation of cost of goods sold ACCOUNT CLASSIFICATION AND PRESENTATION I A c c o u n t T itle C la s s ific a tio n F in a n c ia l S ta t e m e n t N o rm al B a la n c e Accounts Payable Current Liability Balance Sheet Credit Accounts Receivable Current Asset Balance Sheet Debit Accumulated Depreciation—Buildings Plant Asset—Contra Balance Sheet Credit Accumulated Depreciation—Equipment Plant Asset—Contra Balance Sheet Credit Advertising Expense O perating Expense Incom e Statem ent Debit Aliovkiance for Doubtful Accounts Current Asset—Contra Balance Sheet Credit A m onization Expense O perating Expense Income Statem ent Debit Bad Debt Expense B O perating Expense Income Statem ent Debit 1 Bonds Payable Long-Term Liability Balance Sheet Credit Buildings Plant Asset Balance Sheet Debit Balance Sheet Debit C Cash Current Asset Common Stock Stockholders' Equity Balance Sheet Credit Copyrights Intangible Asset Balance Sheet Debit Cost of Goods Sold Cost of Goods Sold Income Statem ent Debit D Current Asset/Long-Term Investment Balance Sheet Debit Debt Investments Depreciation Expense O perating Expense Income Statement Debit Discount on Bonds Payable Dividends Long-Term Liability—Contra Temporary account closed to Retained Earnings Balance Sheet Retained Earnings Statement Debit Debit Dividends Payable Current Liability Balance Sheet Credit E 1Equipment 1Plant Asset | Balance Sheet Debit F 1Operating Expense | Income Statement Debit Freight-Out r n 1 G Gain on Disposal of Plant Assets Other Income Income Statement Credit Goodwill Intangible Asset Balance Sheet Debit Income Summary I Temporary account closed to Retained Earnings Not Applicable (1) r 1 Income Tax Expense Income Tax Expense Income Statement Debit Income Taxes Payable Current Liability Balance Sheet Credit Insurance Expense Operating Expense Income Statement Debit Interest Expense Other Expense Income Statement Debit Interest Payable Current Liability Balance Sheet Credit Interest Receivable Current Asset Balance Sheet Debit Interest Revenue Other Income Income Statement Credit Inventory Current Asset Balance Sheet (2) Debit F in a n c ia l S ta t e m e n t N o rm al B a la n c e A c c o u n t T itle C la s s ific a tio n Land Plant Asset Balance Sheet Debit Loss on Disposal of Plant Assets Other Expense Income Statem ent Debit Maintenance and Repairs Expense Operating Expense Income Statement Debit Mortgage Payable Long-Term Liability Balance Sheet Credit Notes Payable N Current Liability/ Long-Term Liability Balance Sheet Credit Owner’s Equity and Balance Sheet Owner’s Equity Credit Debit L M Owner's Capital O Owner's Equity Owner’s Drawings Temporary account closed to Owner’s Capital Patents Intangible Asset Stockholders’ Equity Balance Sheet Balance Sheet Debit Credit Paid-in Capital in Excess of Par— Preferred Stock Stockholders' Equity Balance Sheet Credit Preferred Stock Stockholders’ Equity Balance Sheet Credit Premium on Bonds Payable Long-Term Liability Balance Sheet Credit Prepaid Insurance Current Asset Balance Sheet Debit Prepaid Rent Current Asset Balance Sheet Debit Income Statement Balance Sheet and Retained Earnings Statement Debit Credit P Paid-in Capital in Excess of Par— Common Stock R Rent Expense Retained Earnings Operating Expense Stockholders' Equity Salaries and Wages Expense Operating Expense Income Statement Debit Salaries and Wages Payable Current Liability Balance Sheet Credit Sales Discounts Revenue—Contra Income Statement Debit Sales Returns and Allowances Revenue—Contra Income Statement Debit Sales Revenue Revenue Income Statement Credit Selling Expenses Operating Expense Income Statement Debit Service Revenue Revenue Income Statement Credit Slock Investments Current Asset/Long-Term Investment Balance Sheet Debit Supplies Current Asset Balance Sheet Debit Supplies Expense Operating Expense Income Statement Debit S T Treasury Stock 1Stockholders’ Equity—Contra 1Balance Sheet 1Debit V Unearned Service Revenue Current Liabilitv Utilities Expense Operating Expense Balance Sheet Credit Income Statement Debit (1) The normal balance for Income Summary will be credit when there is a net income, debit when ihere is a nei loss The Income Summary account does not appear on any financial statement (2) If a periodic system is used, Inventory also appears on the income statement in the calculation of cosi of goods sold Fraud and lr>ternal Control THE MISSING CONTROL E sta blish m en t o f re sp o n sib ility The healthcare company did not adequately restrict the responsibility for authorizing and approving claims transactions The training supervisor should not have been authorized to create claims in the company's "live" system Source: Adapted from Wells, Fraud Casebook (2007), pp 61-70 SEGREGATION OF DUTIES S e g r e g a tio n o f d u t ie s is in d is p e n s a b l e in a n i n t e m a l c o n t r o l s y s te m T h e r e a r e tw o c o m m o n a p p li c a ti o n s o f t h i s p r in c ip le : D if fe r e n t i n d iv id u a ls s h o u ld b e r e s p o n s i b le f o r r e l a te d a c tiv itie s T h e r e s p o n s i b il it y f o r r e c o r d k e e p in g f o r a n a s s e t s h o u ld b e s e p a r a t e f r o m t h e p h y s ic a l c u s to d y o f t h a t a s s e t T h e r a t i o n a l e f o r s e g r e g a ti o n o f d u t ie s is th is : The w ork o f one em ployee should, w ithout a d u plication o f effort, provide a reliable basis for evaluat ing the work o f another em ployee F o r e x a m p le , t h e p e r s o n n e l t h a t d e s ig n a n d p r o g r a m c o m p u t e r i z e d s y s te m s s h o u ld n o t b e a s s i g n e d d u t ie s r e l a te d to d a y -to d a y u s e o f t h e s y s te m O th e r w is e , th e y c o u ld d e s ig n t h e s y s te m to b e n e fit t h e m p e rs o n a lly a n d c o n c e a l t h e f r a u d t h r o u g h d a y - to - d a y u s e SEGREGATION OF RELATED AaiVITIES M aking one individual responsible for related activities increases the potential for errors and irregularities I n s te a d , c o m p a n i e s s h o u ld , f o r e x a m p le , a s s ig n r e l a te d purchasing activities to d iff e re n t in d iv id u a ls R e l a te d p u r c h a s i n g a c tiv itie s i n c l u d e o r d e r i n g m e r c h a n d ise , o r d e r a p p r o v a l, r e c e iv in g g o o d s , a u th o r i z i n g p a y m e n t , a n d p a y in g f o r g o o d s o r s e rv ic e s V a rio u s f r a u d s a r e p o s s ib le w h e n o n e p e r s o n h a n d le s r e la te d p u r c h a s in g a c tiv itie s : • I f a p u r c h a s i n g a g e n t is a llo w e d to o r d e r g o o d s w i t h o u t o b t a i n i n g s u p e r v i s o r y a p p r o v a l, t h e lik e lih o o d o f t h e p u r c h a s i n g a g e n t r e c e iv in g k ic k b a c k s f r o m s u p p li e r s in c r e a s e s • I f a n e m p lo y e e w h o o r d e r s g o o d s a ls o h a n d le s t h e in v o ic e a n d r e c e i p t o f th e g o o d s , a s w e ll a s p a y m e n t a u th o r i z a t io n , h e o r s h e m ig h t a u t h o r i z e p a y m e n t f o r a f ic titio u s in v o ic e T h e s e a b u s e s a r e l e s s lik e ly t o o c c u r w h e n c o m p a n i e s d i v id e t h e p u r c h a s i n g ta s k s S im ila rly , c o m p a n i e s s h o u ld a s s i g n r e l a te d sa les activities to d if f e r e n t i n d i v id u a ls R e la te d s e llin g a c tiv itie s i n c l u d e m a k i n g a s a le , s h ip p i n g ( o r d e liv e rin g ) th e g o o d s t o t h e c u s to m e r , b illin g t h e c u s to m e r , a n d r e c e iv in g p a y m e n t V a rio u s f r a u d s a r e p o s s ib le w h e n o n e p e r s o n h a n d le s r e l a te d s a le s a c tiv itie s : • I f a s a le s p e r s o n c a n m a k e a s a le w i t h o u t o b t a i n i n g s u p e r v i s o r y a p p r o v a l, h e o r s h e m ig h t m a k e s a le s a t u n a u t h o r i z e d p r ic e s t o i n c r e a s e s a le s c o m m is s io n s • A s h ip p i n g c le r k w h o a ls o h a s a c c e s s to a c c o u n t i n g r e c o r d s c o u ld s h ip g o o d s t o h im s e lf • A b illin g c le r k w h o h a n d le s b illin g a n d r e c e ip t c o u ld u n d e r s t a t e t h e a m o u n t b ille d f o r s a le s m a d e to f r ie n d s a n d re la tiv e s T h e s e a b u s e s a r e le s s lik e ly to o c c u r w h e n c o m p a n i e s d iv id e t h e s a le s ta s k s T h e s a le s p e o p le m a k e t h e s a le , th e s h ip p i n g d e p a r t m e n t s h ip s t h e g o o d s o n t h e b a s is o f t h e s a le s o r d e r , a n d t h e b illin g d e p a r t m e n t p r e p a r e s t h e s a ie s in v o ic e a f t e r c o m p a r in g t h e s a le s o r d e r w ith t h e r e p o r t o f g o o d s s h ip p e d 359 360 Fraud, Internal Control, and Cash NATOMY OF A FRAUD Lawrence Fairbanks, the assistant vice-chancellor o f com m unications a t Aesop University, w as allow ed to m ake purchases of under $2,500 fo r his d ep artm ent w ith ou t e xternal approval U nfortunately, he also sometimes bought item s fo r himself, such as expensive antiques and other collectibles H ow did he it? He replaced th e vendor invoices he received w ith fake vendor invoices th at he created The fake invoices had descriptions th at w ere m ore consistent w ith the com m unications department's purchases He submitted these fake invoices to the accounting department as the basis fo r their journal entries and to the accounts payable departm ent as the basis for payment Total take: $475,000 THE MISSING CONTROL Segregation o f duties The university had not properly segregated related purchasing activities Lawrence was ordering items, receiving the items, and receiving the in voice By receiving the invoice, he had control over the documents th at w ere used to account fo r the purchase and thus was able to substitute a fake invoice Source: Adapted from Wells, Fraud Casebook (2007), pp 3-15 SEGREGATION OF RECORDKEEPING FROM PHYSICAL CUSTODY T h e a c c o u n t a n s h o u ld h a v e n e i t h e r p h y s ic a l c u s to d y o f t h e a s s e t n o r a c c e s s to it L ik e w is e , thi c u s to d i a n o f t h e a s s e t s h o u ld n o t m a i n t a i n o r h a v e a c c e s s to t h e a c c o u n tin i r e c o r d s The custodian o f the asset is not likely to convert th e asset to per Accounting employee A Maintains cash balances per books sonal use w hen one em ployee m aintains the record o f the asset, and a dif ferent em ployee has physical custody o f th e asset T h e s e p a r a t i o n o a c c o u n t i n g r e s p o n s i b il it y f r o m t h e c u s to d y o f a s s e t s is e s p e c ia lly i m p o r t a n t fo c a s h a n d in v e n t o r ie s b e c a u s e t h e s e a s s e t s a r e v e ry v u l n e r a b le t o f r a u d Segregation of duties (Accountability for assets) ANATOMY OF A FRAUD i Assistant cashier B Maintains custody of cash on hand Angela Bauer was an accounts payable clerk fo r Aggasiz Construction Company Angela prepared and issued checks to vendors and reconciled bank statements She perpetrated a fraud in this w ay: She w rote checks fo r costs th at the company had not actually incurred (e.g., fake taxes) A supervisor then approved and signed the checks Before issuing the check, though, Angela would "w hite-o ut" the payee line on the check and change it to personal accounts th at she controlled She was able to conceal the th e ft because she also reconciled the bank account T hat is, nobody else ever saw th at the checks had been altered Totaltake: $570.009 THE MISSING CONTROL Segregation o f duties Aggasiz Construction Company did not properly segregate recordkeeping from physical custody Angela had physical custody o f the checks, which essentially was control o f the cash She also had recordkeeping responsibility because she prepared the bank reconciliation Source; Adapted from Wells Fraud Casebook (2007) pp 100-107 D O C U M EN TA TIO N P R O C E D U R ES D o c u m e n ts p r o v id e e v id e n c e t h a t t r a n s a c t i o n s a n d e v e n ts h a v e o c c u r r e d F o e x a m p le B a r r i q u e s ’ p o i n t- o f - s a le t e r m in a l s a r e n e tw o r k e d w i t h t h e c o m p a n y ’ c o m p u t i n g a n d a c c o u n t i n g r e c o r d s , w h ic h r e s u l ts in d i r e c t d o c u m e n t a ti o n Fraud and Internal Control S im ila r ly , a s h ip p i n g d o c u m e n t in d ic a te s t h a t t h e g o o d s h a v e b e e n s h ip p e d , a n d a s a le s in v o ic e in d ic a te s t h a t t h e c o m p a n y h a s b ille d t h e c u s t o m e r f o r t h e g o o d s B y r e q u i r in g s ig n a t u r e s ( o r in itia ls ) o n t h e d o c u m e n t s , t h e c o m p a n y c a n id e n tify t h e in d iv id u a l( s ) r e s p o n s i b le f o r t h e t r a n s a c t i o n o r e v e n t C o m p a n ie s s h o u ld d o c u m e n t t r a n s a c t i o n s w h e n th e y o c c u r C o m p a n ie s s h o u l d e s t a b l i s h p r o c e d u r e s f o r d o c u m e n t s F i r s t , w h e n e v e r p o s s ib le , c o m p a n i e s s h o u l d u s e p renum bered cu m en ts, and all d o c u m ents sh ou ld be a cco u n ted for P r e n u m b e r i n g h e lp s t o p r e v e n t a t r a n s a c t i o n f r o m b e in g r e c o r d e d m o r e t h a n o n c e , o r c o n v e rs e ly , f r o m n o t b e in g r e c o r d e d a t a ll S e c o n d , t h e c o n t r o l s y s te m s h o u l d r e q u i r e t h a t e m p l o y e e s prom ptly forward source d o cu m en ts for a cco u n tin g e n tries to th e a cco u n tin g departm ent T his co n tro l m easure h elp s to en su re tim ely recordin g o f the transaction a n d c o n t r i b u t e s d i r e c tl y t o t h e a c c u r a c y a n d r e l i a b i l it y o f t h e a c c o u n tin g re c o rd s ANATOM Y OF A FRAUD To support th eir reim bursement requests for travel costs incurred, employees at Mod Fashions Corporation's design center were required to submit receipts The receipts could include the detailed bill provided for a meal, the credit card receipt provided when the credit card paym ent is made, or a copy o f the employee's m onthly credit card bill th at listed the item A number of the designers w ho frequently traveled to gether came up w ith a fraud scheme: They submitted claims fo r the same expenses For example If they had a meal together th at cost $200, one person submitted the detailed meal bill, another submitted the credit card receipt, and a third submitted a monthly credit card bill showing the meal as a line item Thus, all three received a $200 reimbursement Total take: $75,000 THE MISSING CONTROL Docum entation p ro ce d u re s Mod Fashions should require the orig inal, detailed receipt It should not accept photocopies, and it should not accept credit card statements In addition, docum entation procedures could be fu rth e r improved by requiring the use o f a corporate credit card (rather than a personal credit card) for all business expenses Source: Adapted from \NeWs, Fraud Casebook (2007), pp 79-90 PHYSICAL CONTROLS U se o f p h y s ic a l c o n tr o l s is e s s e n tia l Physical controls r e la te to t h e s a f e g u a r d in g o f a s s e ts a n d e n h a n c e t h e a c c u r a c y a n d r e lia b ility o f t h e a c c o u n t i n g r e c o r d s I ll u s tr a ti o n 8-2 s h o w s e x a m p le s o f th e s e c o n tr o ls Illustration 8-2 Physical controls Physical Controls w Safes, vaults, and safety deposit boxes for cash and business papers Locked warehouses and storage cabinets for inventories and records Computer facilities with pass key access o r fingerprint or eyeball scans Alarms to prevent break-ins Television monitors and garment sensors to deter theft 361 362 Fraud, Internal Control, and Cash ANATOM Y OF A FRAUD A t Centerstone Health, a large insurance company, th e m ailroom each day received insurance applications from prospective custom ers M ailroom em ployees scanned the applications into electronic documents before the applications w e re processed Once th e applications w e re scanned, th ey could be accessed on line by authorized employees Insurance agents a t Centerstone Health earn commissions based upon successful applications The sales agent's name is listed on the application However, roughly 15% of the applications are from customers w ho did not w ork w ith a sales agent Two friends—Alex, an employee in recordkeeping, and Parviz, a sales agent—thought up a w ay to perpetrate a fraud A lex identified scanned applications th at did not list a sales agent A fter business hours, he entered the mailroom and found the hard-copy applications th at did not show a sales agent He w rote in Parviz's name as the sales agent and then rescanned the application fo r processing Parviz received the commis sion, which the friends then split Total take: $240,000 THE MISSING CONTROL Physical controls Centerstone Health lacked tw o basic physical controls th at could have prevented this fraud First, the mailroom should have been locked during non business hours, and access during business hours should have been tig htly controlled Second, the scanned applications supposedly could be accessed only by authorized employees using th eir passwords However, the password fo r each employee was the same as the employee's user ID Since employee user-ID numbers were available to all other employees, all employees knew all other employees' passwords Unauthorized employees could access the scanned applications Thus, A lex could enter the system using another employee's password and access the scanned applications Source: Adapted from Wells, Fraud Casebook (2007), pp 316-326 IN D EP EN D EN T IN TE R N A L VER IFIC A TIO N M o s t i n t e m a l c o n tr o l s y s te m s p r o v id e f o r ind ep en dent in tem al verification T h is p r in c i p le in v o lv e s t h e r e v ie w o f d a t a p r e p a r e d b y e m p lo y e e s T o o b t a i n m a x i m u m b e n e fit f r o m i n d e p e n d e n t i n t e m a l v e rif ic a tio n : C o m p a n ie s s h o u ld v e rif y r e c o r d s p e r i o d i c a l ly o r o n a s u r p r i s e b a s is A n e m p lo y e e w h o i s i n d e p e n d e n t o f t h e p e r s o n n e l r e s p o n s i b le f o r t h e i n f o r m a t io n s h o u ld m a k e t h e v e rif ic a tio n D i s c r e p a n c ie s a n d e x c e p t i o n s s h o u ld b e r e p o r t e d to a m a n a g e m e n t lev e l th a t c a n ta k e a p p r o p r i a t e c o r r e c ti v e a c ti o n I n d e p e n d e n t i n t e m a l v e r if ic a tio n is e s p e c ia lly u s e f u l i n c o m p a r in g r e c o r d e d a c c o u n t a b il i ty w i t h e x is tin g a s s e ts T h e r e c o n c i li a ti o n o f t h e e le c t r o n i c j o u m a l w ith t h e c a s h in t h e p o in t- o f - s a le t e r m i n a l a t B a r r i q u e s is a n e x a m p le o f th is i n t e m a l c o n tr o l p r in c i p le O t h e r c o m m o n e x a m p l e s a r e t h e r e c o n c i li a ti o n o f a c o m p a n y 's c a s h b a la n c e p e r b o o k s w i t h t h e c a s h b a la n c e p e r b a n k , a n d t h e v e ri f ic a tio n o f t h e p e r p e t u a l in v e n t o r y r e c o r d s t h r o u g h a c o u n t o f p h y s ic a l in v e n to ry , I l l u s tr a ti o n 8-3 s h o w s t h e r e l a ti o n s h ip b e tw e e n t h is p r in c i p le a n d t h e s e g re g a tio n o f d u t ie s p r in c i p le ANATOM Y OF A FRAUD Bobbi Jean Donnelly, the office manager fo r Mod Fashions Corporation's design cen ter, was responsible for preparing the design center budget and reviewing expense re ports submitted by design center employees Her desire to upgrade her wardrobe got the better of her, and she enacted a fraud that involved filing expense-reimbursement requests fo r her own personal clothing purchases Bobbi Jean was able to conceal the fraud because she was responsible for reviewing all expense reports, including her Fraud and Internal Control Illustration 8-3 Comparison of segregation of duties principle with independent internal verification principle Accounting Employee Maintains cash balances per books Independent Internal Verification Assistant Treasurer Makes monthly comparisons; reports any unreconcilable differences to treasurer own In addition, she sometimes was given ultim ate responsibility for signing o ff on the expense reports when her boss was "too busy." Also, because she controlled the budget, when she submitted her expenses, she coded them to budget items th at she knew were running under budget, so that they would not catch anyone's attention Total take: $275,000 THE MISSING CONTROL Independent internal verification Bobbi Jean's boss should have verified her expense reports When asked w h at he thought her expenses fo r a year were, the boss said about $10,000 A t $115,000 per year, her actual expenses were more than 10 times what would have been expected However, because he was "too busy" to verify her expense reports or to review the budget, he never noticed Source: Adapted from Wells, Fraud Casebook (2007), pp 79-90 L a r g e c o m p a n i e s o f te n a s s ig n in d e p e n d e n t in te r n a l v e r if ic a tio n t o in te r n a l a u d ito r s Internal auditors a r e c o m p a n y e m p lo y e e s w h o c o n ti n u o u s ly e v a lu a te th e e ff e c tiv e n e s s o f t h e c o m p a n y 's in te r n a l c o n tr o l s y s te m s T h e y re v ie w t h e a c tiv itie s o f d e p a r t m e n t s a n d i n d iv id u a ls t o d e te r m i n e w h e t h e r p r e s c r ib e d in te r n a l c o n tr o ls a r e b e in g f o llo w e d T h e y a ls o r e c o m m e n d im p r o v e m e n t s w h e n n e e d e d F o r e x a m p le W o r l d C o m w a s a t o n e tim e t h e s e c o n d la r g e s t U S te le c o m m u n ic a tio n s c o m p a n y T h e f r a u d t h a t c a u s e d its b a n k r u p t c y ( th e la r g e s t e v e r w h e n it o c c u r r e d ) in v o lv e d b illio n s o f d o lla r s I t w a s u n c o v e r e d b y a n in te r n a l a u d ito r H U M A N R ES O U R C E C O N TR O LS H u m a n r e s o u r c e c o n tr o l a c tiv itie s i n c lu d e t h e f o llo w in g Bond em ployees w ho handle cash B onding in v o lv e s o b t a i n i n g i n s u r a n c e p r o te c ti o n a g a i n s t t h e f t b y e m p lo y e e s I t c o n t r i b u t e s to t h e s a f e g u a r d in g o f c a s h i n t w o w a y s F irs t, t h e i n s u r a n c e c o m p a n y c a r e f u ll y s c r e e n s a ll in d iv id u a ls b e f o r e a d d in g th e m to t h e p o lic y a n d m a y r e je c t r is k y a p p li c a n ts S e c o n d , b o n d e d e m p l o y e e s k n o w t h a t t h e i n s u r a n c e c o m p a n y w ill v ig o r o u s ly p r o s e c u te a ll o f f e n d e r s Rotate em p lo y ees’ duties and require em ployees to take vacations T h e s e m e a s u r e s d e t e r e m p lo y e e s f ro m a tt e m p t in g t h e f t s s in c e t h e y w ill n o t b e a b le to p e r m a n e n tl y c o n c e a l t h e i r i m p r o p e r a c tio n s M a n y b a n k s , f o r e x a m p le 63 364 Fraud, Internal Control, and Cash h a v e d is c o v e r e d e m p lo y e e t h e f t s w h e n t h e e m p lo y e e w a s o n v a c a t i o n o r a s s i g n e d t o a n e w p o s it io n C o n d u c t th o r o u g h b a c k g r o u n d c h e c k s M a n y b e h e v e th a t th e m o st im p o r ta n t a n d in e x p e n s iv e m e a s u r e a n y b u s in e s s c a n ta k e to re d u c e e m p l o y e e t h e f t a n d f r a u d is f o r t h e h u m a n r e s o u r c e s d e p a r t m e n t t o c o n d u c t t h o r o u g h b a c k g r o u n d c h e c k s T w o t ip s : (1 ) C h e c k t o s e e w h e t h e r j o b a p p l i c a n t s a c t u a l l y g r a d u a t e d f r o m t h e s c h o o ls t h e y l is t (2 ) N e v e r u s e t e l e p h o n e n u m b e r s f o r p r e v i o u s e m p l o y e r s p r o v i d e d b y t h e a p p l i c a n t A lw a y s lo o k t h e m u p y o u r s e lf ANATOM Y OF A FRAUD Ellen Lowry was the desk manager and Josephine Rodriguez was the head o f house keeping a t the Excelsior Inn, a luxury hotel The tw o best friends w ere so dedicated to th eir jobs th at they never took vacations, and they frequently filled in fo r other employees In fact, Ms Rodriguez, whose job as head of housekeeping did not in clude cleaning rooms, often cleaned rooms herself, "just to help the staff keep up." These tw o "dedicated" employees, w orking as a team , found a w ay to earn a little more cash Ellen, the desk manager, provided significant discounts to guests who paid w ith cash She kept the cash and did not register the guest in the hotel's comput erized system Instead, she took the room out o f circulation "due to routine m ainte nance." Because the room did not show up as being used, it did not receive a normal housekeeping assignment Instead, Josephine, the head of housekeeping, cleaned the rooms during the guests' stay THE MISSING CONTROL Human resource cor)trols Ellen, the desk manager, had been fired by a previous employer after being accused of fraud If the Excelsior Inn had conducted a thorough background check, it would not have hired her The hotel fraud was detected when Ellen missed w ork fo r a fe w days due to illness A system of m andatory vacations and rotating days off w ould have increased the chances o f detecting the fraud before it became so large Source: Adapted from Wells Fraud Casebook (2007), pp 145-155 Accounting Across the Organization S O X B o o s t s t h e R o le o f H u m a n R e s o u rc e s Under SOX, a company needs to keep track of employees’ degrees and certifications to ensure that employees continue to meet the specified requirements of a job Also, to ensure proper employee supervi sion and proper separation of duties, companies must develop and moni tor an organizational chart When one corporation went through this exercise, it found that out of 17,000 employees, there were 400 people who did not report to anyone The Stockb)ie/GetTy Images Inc corporation also had 35 people who reported to each other In addition, if an employee complains of an unfair firing and mentions financial issues at the company, HR should refer the case to the company audit committee and possibly to its legal counsel Why would unsupervised employees or employees who report to each other represent potential internal control threats? (Go to WileyPLUS for this answer and additional questions.) Fraud and Internal Control 365 Limitations of Internal Control C o m p a n ie s g e n e r a l ly d e s ig n t h e i r s y s te m s o f i n t e r n a l c o n t r o l to p r o v i d e rea sonable assurance o f p r o p e r s a f e g u a r d i n g o f a s s e t s a n d r e l i a b i l i t y o f t h e a c c o u n tin g re c o rd s T h e c o n c e p t o f re a s o n a b le a s s u r a n c e r e s ts o n th e p r e m is e t h a t t h e c o s ts o f e s t a b l i s h i n g c o n t r o l p r o c e d u r e s s h o u l d n o t e x c e e d t h e i r e x p e c te d b e n e fit T o i ll u s tr a te , c o n s id e r s h o p li f ti n g l o s s e s i n r e t a il s to r e s S t o r e s c o u ld e lim i n a te s u c h lo s s e s b y h a v in g a s e c u r i ty g u a r d s to p a n d s e a r c h c u s to m e r s a s th e y lea v e t h e s to r e B u t s to r e m a n a g e r s h a v e c o n c lu d e d t h a t t h e n e g a tiv e e f f e c ts o f s u c h a p r o c e d u r e c a n n o t b e ju s tif ie d I n s t e a d , th e y h a v e a tt e m p t e d to c o n tr o l s h o p lif tin g lo s s e s b y le s s c o s tly p r o c e d u r e s T h e y p o s t s ig n s s a y in g , "W e r e s e r v e th e r ig h t to in s p e c t a ll p a c k a g e s " a n d "All s h o p li f te r s w ill b e p r o s e c u t e d ” T h e y u s e h id d e n c a m e r a s a n d s to r e d e te c tiv e s to m o n i t o r c u s t o m e r a c tiv ity , a n d th e y in s ta ll s e n s o r e q u ip m e n t a t e x its T h e hum an elem ent is a n i m p o r ta n t f a c t o r i n e v e ry s y s te m o f i n te r n a l c o n tro l A g o o d s y s te m c a n b e c o m e in e f f e c tiv e a s a r e s u l t o f e m p lo y e e f a tig u e , c a r e le s s n e s s, o r i n d if fe r e n c e F o r e x a m p le , a r e c e iv in g c le r k m a y n o t b o t h e r to c o u n t g o o d s re c e iv e d a n d m a y j u s t " fu d g e " t h e c o u n ts O c c a s io n a lly , t w o o r m o r e i n d i v id u a ls m a y w o r k t o g e t h e r t o g e t a r o u n d p r e s c r ib e d c o n tr o l s S u c h collusion c a n sig n ific a n tly r e d u c e t h e e ff e c tiv e n e s s o f a s y s te m , e li m in a ti n g t h e p r o te c ti o n o ffe re d b y s e g r e g a tio n o f d u t ie s N o s y s te m o f i n te r n a l c o n tr o l is p e rf e c t T h e size o f the b u sin ess a ls o m a y im p o s e l im it a ti o n s o n i n te r n a l c o n tr o l S m a ll c o m p a n ie s o f te n f in d it d iff ic u lt to s e g re g a te d u t ie s o r to p r o v id e f o r i n d e p e n d e n t in te r n a l v e rif ic a tio n A s tu d y b y t h e A s s o c ia tio n o f C e r tif ie d F r a u d E x a m in e rs { R e p o r t t o t h e N a t i o n o n O c c u p a t i o n a l F r a u d a n d A b u s e ) i n d ic a te s t h a t b u s in e s s e s w i t h f e w e r t h a n 100 e m p lo y e e s a r e m o s t a t r is k f o r e m p lo y e e t h e f t I n fac t, 29 % o f f r a u d s o c c u r r e d a t c o m p a n i e s w i t h f e w e r t h a n 10 e m p lo y e e s T h e m e d ia n lo s s a t s m a ll c o m p a n i e s w a s $ ,0 0 , w h ic h w a s c lo s e to t h e m e d i a n f u d a t c o m p a n i e s w i t h m o r e t h a n ,0 0 e m p lo y e e s {$ ,0 0 ) A $ ,0 0 lo ss c a n t h r e a te n t h e v e ry e x is te n c e o f a s m a ll c o m p a n y DO IT! Helpful Hint Controls may vary with the risk level of the activity For example, management may consider cash to be high risk and maintaining inventories in the stock room as low risk Thus, management would have stricter controls for cash C o n t r o l A c t iv it ie s Identify which control activity is violated in each of the following situations, and explain how the situation creates an opportunity for a fraud The person with prim ary responsibility for reconciling the bank account and making all bank deposits is also the company’s accountant Wellstone Company’s treasurer received an award for distinguished service because he had not taken a vacation in 30 years In order to save money spent on order slips and to reduce time spent keeping track of order slips, a local bar/restaurant does not buy prenum bered order slips Solution Violates the control activity of segregation of duties Recordkeeping should be sep arate from physical custody As a consequence, the employee could embezzle cash and make joum al entries to hide the theft Violates the control activity of hum an resource controls Key employees must take vacations Otherwise, the treasurer, who manages the com pany’s cash, might embezzle cash and use his position to conceal the theft Violates the control activity of docum entation procedures If prenum bered docu ments are not used, then it is virtually impossible to account for the documents As a consequence, an employee could write up a dinner sale, receive the cash from the customer, and then throw away the order slip and keep the cash R elated exercise m ateriat; B t8 -1 BE8-2, B E8-3 BL8-4, L8-1, a n d c Action Plan Familiarize yourself with each of the control activities summarized on page 358 Understand the nature of the frauds that each control activity is intended to address 366 Fraud, Internal Control, and Cash LEARNING OBJECTIVE Apply internal control principles to cash C a s h is t h e o n e a s s e t t h a t is r e a d i ly c o n v e r tib le i n to a n y o t h e r t y p e o f a s s e t I t a lso is e a s ily c o n c e a l e d a n d t r a n s p o r t e d , a n d is h ig h ly d e s ir e d B e c a u s e o f t h e s e c h a r a c te r is t ic s , cash is the a sset m ost susceptible to h-audulent activities I n a d d i t io n , b e c a u s e o f t h e l a r g e v o l u m e o f c a s h t r a n s a c t i o n s , n u m e r o u s e r r o r s m a y o c c u r in e x e c u tin g a n d r e c o r d in g t h e m T o s a f e g u a r d c a s h a n d to e n s u r e th e a c c u r a c y o f t h e a c c o u n t i n g r e c o r d s f o r c a s h , e ff e c tiv e i n t e m a l c o n t r o l o v e r c a s h is c r itic a l Cash Receipts Controls I ll u s tr a ti o n -4 s h o w s h o w t h e i n t e m a l c o n t r o l p r in c i p le s e x p la i n e d e a r l i e r a p p ly t o c a s h r e c e i p ts t r a n s a c t i o n s A s y o u m ig h t e x p e c t, c o m p a n i e s v a r y c o n s id e r a b ly in h o w t h e y a p p ly t h e s e p r in c i p le s T o i ll u s t r a te i n t e m a l c o n tr o l o v e r c a s h r e c e ip ts , w e w all e x a m in e c o n tr o l a c tiv itie s f o r a r e t a il s to r e w i t h b o t h o v e r - th e - c o u n te r a n d m a il r e c e ip ts Illustration 8*4 Application of internal control principles to cash receipts Cash Receipts Controls Establishment of Responsibility O nl/ designated personnel are authorized to handle cash receipts (cashiers) © Segregation of Duties Different individuals receive cash, record cash receipts, and hold the cash Documentation Procedures Use remittance advice (mail receipts), cash register tapes or computer records, and deposit slips © ► Physical Controls Store cash in safes and bank vaults: limit access to storage areas: use cash registers Independent Internal Verification Supervisors count cash receipts daily; assistant treasurer compares total receipts to bank deposits daily !? Human Resource Controls Bond personnel who handle cash; require employees to take vacations; conduct background checks OVER-THE-COUNTER RECEIPTS I n r e ta il b u s in e s s e s , c o n tr o l o f o v e r - t h e - c o u n te r r e c e i p ts c e n te r s o n c a s h r e g is te r s t h a t a r e v is ib le to c u s to m e r s A c a s h s a le is e n te r e d i n a c a s h r e g i s te r ( o r p o in t- o fs a le t e r m in a l ) , w i t h t h e a m o u n t c le a r ly v is ib le t o t h e c u s to m e r T h i s a c ti v it v p r e v e n t s t h e s a le s c le r k f r o m e n t e r i n g a l o w e r a m o u n t a n d p o c k e t i n g t h e d i f f e r e n c e T h e c u s t o m e r r e c e i v e s a n i te m iz e d c a s h r e g i s t e r r e c e i p t s l i p a n d is e x p e c t e d to c o u n t th e c h a n g e r e c e iv e d (O n e w e a k n e s s a t B a r r i q u e s in t h e F e a tu r e S to rv ' is t h a t c u s to m e r s a r e o n ly g iv en a r e c e ip t if r e q u e s te d ) T h e c a s h r e g is te r s Cash Controls 367 ta p e is lo c k e d i n t h e r e g i s te r u n t il a s u p e r v i s o r r e m o v e s it T h is t a p e a c c u m u l a t e s t h e d a ily t r a n s a c t i o n s a n d t o ta ls A t t h e e n d o f t h e c le r k 's s h if t, t h e c le r k c o u n ts t h e c a s h a n d s e n d s t h e c a s h a n d t h e c o u n t to t h e c a s h ie r T h e c a s h i e r c o u n ts t h e c a s h , p r e p a r e s a d e p o s it s lip , a n d d e p o s its t h e c a s h a t t h e b a n k T h e c a s h i e r a ls o s e n d s a d u p l ic a te o f t h e d e p o s it s lip t o t h e a c c o u n t i n g d e p a r t m e n t t o i n d ic a te c a s h r e c e iv e d T h e s u p e r v i s o r re m o v e s t h e c a s h r e g i s te r t a p e a n d s e n d s it to t h e a c c o u n t i n g d e p a r t m e n t a s t h e b a s is f o r a j o u r n a l e n tr y to r e c o r d t h e c a s h re c e iv e d ( F o r p o in t- o f - s a le s y s te m s , th e a c c o u n t i n g d e p a r t m e n t r e c e iv e s i n f o r m a t io n o n d a ily t r a n s a c t i o n s a n d t o ta l s t h r o u g h t h e c o m p u t e r n e tw o r k ) I ll u s tr a ti o n 8-5 s u m m a r i z e s t h is p r o c e s s Illustration 8-5 Clerk Enters sales, counts cash Supervisor Removes locked cash register tape Sends cash and count to cashier Sends cash gister tape to accou :ing dept Cashier Counts cash, prepares deposit slips Accounting Department Agrees register tape to deposit slip and records journal entry i Sends deposit slip copy to accounting dept Sends cash and deposit slip to bank T h is s y s te m f o r h a n d li n g c a s h r e c e i p ts u s e s a n i m p o r t a n t i n t e r n a l c o n tr o l p r in c ip le — s e g r e g a tio n o f r e c o r d k e e p in g f r o m p h y s ic a l c u s to d y T h e s u p e r v i s o r h a s a c c e s s to t h e c a s h r e g i s te r t a p e b u t n o t to t h e c a s h T h e c le r k a n d t h e c a s h i e r h a v e a c c e s s to t h e c a s h b u t n o t lo t h e r e g i s te r ta p e I n a d d it i o n , t h e c a s h r e g i s te r ta p e p r o v id e s d o c u m e n t a ti o n a n d e n a b le s i n d e p e n d e n t i n te r n a l v e rif ic a tio n U se o f th e s e t h r e e p r in c i p le s o f i n t e r n a l c o n tr o l ( s e g r e g a tio n o f r e c o r d k e e p in g f r o m p h y s ic a l c u s to d y , d o c u m e n t a ti o n , a n d i n d e p e n d e n t i n t e r n a l v e rif ic a tio n ) p r o v id e s a n e ffe c tiv e s y s te m o f in te r n a l c o n tr o l A n y a tt e m p t a t f r a u d u l e n t a c tiv ity s h o u ld b e d e te c te d u n l e s s t h e r e is c o llu s io n a m o n g t h e e m p lo y e e s I n s o m e in s ta n c e s , t h e a m o u n t d e p o s it e d a t t h e b a n k w ill n o t a g r e e w i t h th e c a s h r e c o r d e d in t h e a c c o u n t i n g r e c o r d s b a s e d o n t h e c a s h r e g i s te r ta p e T h e s e d if f e r e n c e s o f te n r e s u lt b e c a u s e t h e c le r k h a n d s i n c o r r e c t c h a n g e b a c k to th e r e ta il c u s t o m e r I n th is c a s e , t h e d iff e re n c e b e tw e e n t h e a c tu a l c a s h a n d th e a m o u n t r e p o r t e d o n th e c a s h r e g i s te r t a p e is r e p o r t e d in a C a s h O v e r a n d S h o r t Control of over-the-counter receipts Helpful Hint Flowcharts such as this one enhance the under standing of the flow of documents, the processing steps, and the internal control procedures 368 Fraud, Internal Control, and Cash account For example, suppose that the cash register tape indicated sales of $6,956.20 but the amount of cash was only $6,946.10 A cash shortfall of $10.10 exists To account for this cash shortfall and related cash, the company makes the following entry - 10 +6,956 20 Cash Flows +6,946.10 t Cash Cash Over and Short Sales Revenue (To record cash shortfall) 6,946.10 10.10 6,956.20 Cash Over and Short is an income statement item It is reported as miscella neous expense when there is a cash shortfall, and as miscellaneous revenue when there is an overage Clearly, the amount should be smail Any material amounts in this account should be investigated M AIL RECEIPTS All mail receipts should be opened in the presence of at least two mail clerks These receipts are generally in the form of checks A mail clerk should endorse each check "For Deposit Only." This restrictive endorsem ent reduces the like lihood that someone could divert the check to personal use Banks will not give an individual cash when presented with a check that has this type of endorsement The mail clerks prepare, in triplicate, a list of the checks received each day This list shows the name of the check issuer, the purpose of the payment, and the amount of the check Each mail clerk signs the list to establish responsibil ity for the data The original copy of the Hst, along with the checks, is then sent to the cashier's department A copy of the list is sent to the accounting depart ment for recording in the accounting records The clerks also keep a copy This process provides excellent internal control for the company By employing two clerks, the chance of fraud is reduced Each clerk knows he or she is being observed by the other clerk(s) To engage in fraud, they would have to collude The customers who submit payments also provide control because they will contact the company with a complaint if they are not properly credited for payment Because the cashier has access to cash but not the records, and the accounting department has access to records but not cash, neither can engage in undetected fraud DO IT! 2a Action Plan ✓ Differentiate among the internal control principles of (1) establishing responsibility, (2) using physical controls, and (3 )independent internal verification Design an effective system of internal control over cash receipts C o n t r o l o v e r C a s h R e c e ip t s L R Cortez is concerned about the control over cash receipts in his fast-food restaurant Big Cheese The restaurant has two cash registers At no time more than two employ ees take custom er orders and enter sales Work shifts for employees range from to hours Cortez asks your help in installing a good system of internal control o\ e r cash receipts Solution Cortez should assign a separate cash register draw er to each employee at the s ta n of each work shift, with register totals set at zero Each employee should have access to only the assigned register draw er to enter all sales Each custom er should be gi\ en a receipt At the end of the shift, the employee should a cash count A separate employee should com pare the cash count with the register tape to be sure they agree In addition, Cortez should install an autom ated system that would enable the com pany to com pare orders entered in the register to orders processed by the kitchen R elated exercise m aierial: • l(i H-6, ni.S-7 1.8-2 Cash Controls Cash Disbursements Controls C o m p a n ie s d i s b u r s e c a s h f o r a v a r ie ty o f r e a s o n s , s u c h a s t o p a y e x p e n s e s a n d lia b ilitie s o r t o p u r c h a s e a s s e ts Generally, in tem a l control over cash d isbu rse m ents is m ore effective w hen com pan ies pay by ch eck or electron ic funds transfer (EFT) rather than by cash O n e e x c e p tio n is paym ents for incidental amounts that are paid out o f petty cash.^ C o m p a n ie s g e n e lly i s s u e c h e c k s o n ly a f t e r fo llo w in g s p e c if ie d c o n tr o l p r o c e d u re s I ll u s tr a ti o n 8-6 s h o w s h o w p r in c i p le s o f i n t e m a l c o n tr o l a p p ly to c a s h d is b u r s e m e n ts Cash Disbursements Controls Establishment of Responsibility Only designated personnel are authorized to sign checks (treasurer) and approve vendors Segregation of Duties Different individuals approve and make payments: checksigners not record disbursements Documentation Procedures Use prenumbered checks and account for them in sequence: each check must have an approved invoice; require employees to use corporate credit cards for reimbursable expenses: stamp invoices “ paid" m Physical Controls Store blank checks in safes, w/ith 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 VOUCHER SYSTEM CONTROLS M o s t m e d i u m a n d la r g e c o m p a n i e s u s e v o u c h e r s a s p a r t o f t h e i r i n t e m a l c o n tr o l o v e r c a s h d i s b u r s e m e n t s A voucher system is a n e tw o r k o f a p p r o v a l s b y a u t h o riz e d in d iv id u a ls , a c ti n g in d e p e n d e n tly , to e n s u r e t h a t a ll d i s b u r s e m e n t s b y c h e c k a r e p r o p e r T h e s y s te m b e g in s w ith th e a u th o r i z a t io n t o i n c u r a c o s t o r e x p e n se It e n d s w ith th e is s u a n c e o f a c h e c k f o r t h e l ia b ility i n c u r r e d A voucher is a n a u th o r i z a t io n fo rm p r e p a r e d f o r e a c h e x p e n d itu r e C o m p a n ie s r e q u i r e v o u c h e r s f o r all ty p e s o f c a s h d i s b u r s e m e n t s e x c e p t th o s e f r o m p e tty c a s h ^We explain the o peration o f a petty cash fund on pages 370-372 Iltustration 8-6 Application of internal control principles to cash disbursements 369 370 Fraud, Internal Control, and Cash T h e s t a r t i n g p o i n t in p r e p a r i n g a v o u c h e r is to fill in t h e a p p r o p r i a t e i n f o r m a t io n a b o u t t h e l ia b ility o n t h e f a c e o f t h e v o u c h e r T h e v e n d o r s i n v o ic e p r o v id e s m o s t o f t h e n e e d e d i n f o r m a t io n T h e n , a n e m p lo y e e in a c c o u n t s p a y a b le r e c o r d s t h e v o u c h e r ( in a j o u m a l c a lle d a v o u c h e r register) a n d file s it a c c o r d i n g to th e d a t e o n w h ic h it is to b e p a id T h e c o m p a n y i s s u e s a n d s e n d s a c h e c k o n t h a t d a te , a n d s ta m p s t h e v o u c h e r " p a id " T h e p a i d v o u c h e r is s e n t to t h e a c c o u n t i n g d e p a r t m e n t f o r r e c o r d in g ( in a j o u m a l c a lle d t h e c h eck register) A v o u c h e r s y s te m in v o lv e s t w o j o u m a l e n tr i e s , o n e to r e c o r d t h e l ia b i li ty w h e n t h e v o u c h e r is is s u e d a n d a s e c o n d to p a y t h e l ia b i li ty t h a t r e l a te s to t h e v o u c h e r T h e u s e o f a v o u c h e r s y s te m , w h e t h e r d o n e m a n u a l ly o r e le c tro n ic a lly , i m p r o v e s i n t e r n a l c o n tr o l o v e r c a s h d i s b u r s e m e n t s F i r s t , t h e a u t h o r i z a t i o n p r o c e s s i n h e r e n t i n a v o u c h e r s y s te m e s ta b l is h e s r e s p o n s ib ility E a c h in d i\-id u a l h a s r e s p o n s i b il it y t o r e v ie w t h e u n d e r l y i n g d o c u m e n t a t i o n to e n s u r e t h a t it is c o rr e c t I n a d d it i o n , t h e v o u c h e r s y s te m k e e p s t r a c k o f t h e d o c u m e n t s t h a t b a c k u p e a c h t r a n s a c t i o n B y k e e p in g t h e s e d o c u m e n t s in o n e p la c e , a s u p e r v i s o r c a n in d e p e n d e n tl y v e rify t h e a u t h e n t i c i t y o f e a c h t r a n s a c t i o n C o n s id e r, f o r e x a m p le , th e c a s e o f A e s o p U n iv e rs ity p r e s e n t e d o n p a g e A e s o p d i d n o t u s e a v o u c h e r s y s te m f o r t r a n s a c t i o n s u n d e r $ ,5 0 A s a c o n s e q u e n c e , t h e r e w a s n o i n d e p e n d e n t v e r if ic a tio n o f t h e d o c u m e n t s , w h ic h e n a b le d t h e e m p lo y e e t o s u b m i t fake i n v o ic e s t o h id e h is u n a u t h o r i z e d p u r c h a s e s Petty Cash Fund A s y o u j u s t l e a m e d , b e t t e r i n t e r n a l c o n t r o l o v e r c a s h d i s b u r s e m e n t s is p o s s ib le w h e n c o m p a n i e s m a k e p a y m e n t s b y c h e c k H o w e v e r, u s i n g c h e c k s t o p a y s m a ll a m o u n t s is b o t h i m p r a c t i c a l a n d a n u i s a n c e F o r i n s t a n c e , a c o m p a n y w o u ld n o t w a n t t o w r i te c h e c k s to p a y f o r p o s ta g e d u e , w o r k i n g l u n c h e s , o r ta x i fa re s A c o m m o n w a y o f h a n d lin g s u c h p a y m e n ts , w h ile m a in ta in in g s a tis fa c to r y c o n tr o l , is t o u s e a petty cash f u n d t o p a y r e l a ti v e ly s m a l l a m o u n t s T h e o p e r a t io n o f a p e tt y c a s h f u n d , o f te n c a lle d a n im prest system , in v o lv e s (1 ) e s ta b l is h i n g t h e f u n d , (2 ) m a k i n g p a y m e n t s f r o m t h e f u n d , a n d ( ) r e p l e n i s h i n g t h e f u n d ^ EST A B LISH IN G TH E P E T T Y CA SH FUN D T w o e s s e n t ia l s te p s in e s ta b l is h i n g a p e tt y c a s h f u n d a r e (1 ) a p p o i n t i n g a p e tty c a s h c u s to d i a n w h o w ill b e r e s p o n s i b le f o r t h e f u n d , a n d (2 ) d e t e r m i n i n g t h e s iz e o f t h e f u n d O r d in a r ily , a c o m p a n y e x p e c ts t h e a m o u n t in t h e f u n d t o c o v e r a n ti c i p a t e d d i s b u r s e m e n t s f o r a t h r e e - to f o u r- w e e k p e r io d T o e s ta b l is h t h e f u n d , a c o m p a n y i s s u e s a c h e c k p a y a b le to t h e p e tt y c a s h c u s to d i a n f o r t h e s t i p u la t e d a m o u n t F o r e x a m p le , i f L a i r d C o m p a n y d e c id e s to e s ta b l is h a $ 0 f u n d o n M a r c h 1, t h e g e n e r a l j o u m a l e n tr y is: M ar Cash Flows Petty Cash Cash (To establish a petty cash fund) 100 100 no effect E T H IC S N O T ! Petty cash funds are authorized and legitimate In contrast, "slush" funds are unauthorized and hidden (under the table) T h e f u n d c u s to d i a n c a s h e s t h e c h e c k a n d p la c e s t h e p r o c e e d s in a lo c k e d p e tty c a s h b o x o r d r a w e r M o s t p e tty c a s h f u n d s a r e e s ta b l is h e d o n a f ix e d - a m o u n t b a s is T h e c o m p a n y w ill m a k e n o a d d it i o n a l e n tr i e s to t h e P e tty C a s h a c c o u n t u n l e s s m a n a g e m e n t c h a n g e s t h e s ti p u la t e d a m o u n t o f t h e f u n d F o r e x a m p le , if L a ir d C o m p a n y d e c id e s o n J u ly to in c r e a s e t h e s iz e o f t h e f u n d to $ , it w o u ld d e b it P e tty C a s h $ a n d c r e d i t C a s h $ M A K IN G PA YM EN TS FRO M TH E P ET T Y C A SH FUND T h e p e tty c a s h c u s to d ia n h a s th e a u th o r i ty to m a k e p a y m e n ts fro m t h e f u n d th a t c o n fo r m to p r e s c r ib e d m a n a g e m e n t p o lic ie s U su ally , m a n a g e m e n t lim its t h e s iz e o f 'T he term "im prest ” m eans an ad \ ance o f m oney for a designated purpose Cash Controls e x p e n d itu re s t h a t c o m e f ro m p e tty c a s h L ik e w ise , it m a y n o t p e r m i t u s e o f t h e f u n d fo r c e r ta in ty p e s o f tra n s a c t i o n s ( s u c h a s m a k in g s h o r t - te r m lo a n s t o e m p lo y e e s ) E a c h p a y m e n t f r o m t h e f u n d m u s t b e d o c u m e n t e d o n a p r e n u m b e r e d p e tty c a s h r e c e i p t ( o r p e tt y c a s h v o u c h e r ) , a s s h o w n i n I l l u s t r a t i o n -7 T h e s ig n a t u r e s o f b o t h t h e f u n d c u s to d i a n a n d t h e p e r s o n r e c e iv in g p a y m e n t a r e r e q u i r e d o n t h e r e c e ip t I f o t h e r s u p p o r t i n g d o c u m e n t s s u c h a s a f re i g h t b ill o r in v o ic e a r e a v a il a b le , t h e y s h o u ld b e a t t a c h e d t o t h e p e tt y c a s h r e c e ip t 371 Helpful Hint The petty cash receipt satisfies two internal control procedures: (1) establishing responsibility (signature of custodian), and (2) documentation procedures illustration 8-7 Petty cash receipt LAIRD COMPANY Petty Cash Receipt D ate A cm e E x p re s s A gency Paid to For 5/6/17 Am ount $ 0 CoUeot E x p r e s s C harges CH A RG E TO F re ig h t-in Approved Received Payment OustodíAn íV\jLÚfU-. T h e p e tty c a s h c u s to d i a n k e e p s t h e r e c e i p ts in t h e p e tt y c a s h b o x u n t il t h e f u n d is r e p le n is h e d T h e s u m o f t h e p e tty c a s h r e c e i p ts a n d t h e m o n e y in t h e f u n d s h o u ld e q u a l t h e e s ta b l is h e d t o ta l a t a ll t im e s M a n a g e m e n t c a n ( a n d s h o u ld ) m a k e s u r p r i s e c o u n ts a t a n y t im e to d e t e n n i n e w h e t h e r t h e f u n d is b e in g m a i n ta in e d c o rre c tly T h e c o m p a n y d o e s n o t m a k e a n a c c o u n t i n g e n tr y t o r e c o r d a p a y m e n t w h e n it is m a d e f r o m p e tt y c a s h I t is c o n s id e r e d b o t h in e x p e d i e n t a n d u n n e c e s s a r y to d o so I n s te a d , t h e c o m p a n y r e c o g n iz e s th e a c c o u n t i n g e ff e c ts o f e a c h p a y m e n t w h e n it r e p le n is h e s t h e f u n d R EPLEN ISH IN G T H E P E T T Y CASH FUND W h e n t h e m o n e y in t h e p e tt y c a s h f u n d r e a c h e s a m in i m u m lev e l, t h e c o m p a n y r e p le n is h e s t h e f u n d T h e p e tt y c a s h c u s to d i a n i n it ia t e s a r e q u e s t f o r r e i m b u r s e m e n t T h e i n d iv id u a l p r e p a r e s a s c h e d u le ( o r s u m m a r y ) o f t h e p a y m e n t s t h a t h a v e b e e n m a d e a n d s e n d s t h e s c h e d u le , s u p p o r t e d b y p e tt y c a s h r e c e i p ts a n d o t h e r d o c u m e n t a ti o n , to t h e t r e a s u r e r ’s o ffic e T h e t r e a s u r e r ’s o ffic e e x a m i n e s th e r e c e ip ts a n d s u p p o r t i n g d o c u m e n t s to v e rify t h a t p r o p e r p a y m e n t s f r o m t h e f u n d w e re m a d e T h e t r e a s u r e r t h e n a p p r o v e s t h e r e q u e s t a n d i s s u e s a c h e c k to r e s t o r e th e f u n d to i ts e s ta b l is h e d a m o u n t A t t h e s a m e tim e , a ll s u p p o r t i n g d o c u m e n t a tio n is s ta m p e d " p a id ” s o t h a t it c a n n o t b e s u b m i tt e d a g a in f o r p a y m e n t To illu s tr a te , a s s u m e t h a t o n M a r c h 15 L a ird 's p e tt y c a s h c u s to d i a n r e q u e s t s a c h e c k f o r $ T h e f u n d c o n ta i n s $ c a s h a n d p e tt y c a s h r e c e i p ts f o r p o s ta g e $ 44, f re ig h t- o u t $ , a n d m is c e ll a n e o u s e x p e n s e s $ T h e g e n e r a l j o u m a l e n tr y to r e c o r d t h e c h e c k is a s fo llo w s Postage Expense Freight-Out Miscellaneous Expense Cash (To replenish petty cash fund) E T H IC S N O T E Internal control over a petty cash fund is strengthened by (1) having a supervisor make surprise counts of the fund to confirm whether the paid petty cash receipts and fund cash equal the imprest amount, and (2) canceling or mutilating the paid petty cash receipts so they cannot be resubmitted for reimbursement 44 38 - 4 Exp - Exp - Exp 87 Cash Flows »*% 87 N o te t h a t t h e r e i m b u r s e m e n t e n tr y d o e s n o t a ff e c t t h e P e tty C a s h a c c o u n t R e p l e n is h m e n t c h a n g e s th e c o m p o s i ti o n o f t h e f u n d b y r e p l a c in g th e p e tty c a s h r e c e i p ts w i t h c a s h It d o e s n o t c h a n g e t h e b a la n c e in th e fu n d , ¿ 372 Fraud, Internal Control, and Cash O c c a s io n a lly , in r e p l e n i s h i n g a p e tt y c a s h f u n d , t h e c o m p a n y m a y n e e d to re c o g n iz e a c a s h s h o rta g e o r o v e g e T h is r e s u lts w h e n th e to ta l o f th e c a sh p l u s r e c e i p t s i n t h e p e t t y c a s h b o x d o e s n o t e q u a l t h e e s t a b l i s h e d a m o u n t o f th e p e t t y c a s h f u n d T o i l l u s t r a t e , a s s u m e t h a t L a i r d s p e t t y c a s h c u s t o d i a n h a s o n ly $ in c a s h in t h e f u n d p l u s t h e r e c e i p t s a s l is te d T h e r e q u e s t f o r r e i m b u r s e m e n t w o u l d t h e r e f o r e b e f o r $ 8 , a n d L a i r d w o u l d m a k e t h e f o ll o w i n g e n try -4 -3 -5 -1 Helpful Hint Cash over and short situations result from mathematical errors or from failure to keep accurate records 44 38 Postage Expense Freight-Out M iscellaneous Expense Cash Over and Short Cash (To replenish petty cash fund) Exp Exp Exp Exp C onversely , if t h e c u s to d ia n h a s $ 14 i n c a s h , t h e r e i m b u r s e m e n t r e q u e s t w o u ld b e for $86 T h e c o m p a n y w o u ld c re d it C a s h O v e r a n d S h o r t f o r $1 (o v e g e ) A c o m p a n y r e p o r ts a d e b it b a la n c e in C a s h O v e r a n d S h o r t in t h e i n c o m e s ta t e m e n t a s m isc e lla n e o u s e x p e n se I t r e p o r ts a c re d it b a la n c e in th e a c c o u n t a s m is c e lla n e o u s re v e n u e T h e c o m p a n y c lo s e s C a s h O v e r a n d S h o r t to I n c o m e S u m m a r y a t t h e e n d o f t h e y e a r C o m p a n ie s s h o u ld r e p l e n is h a p e tt y c a s h f u n d a t t h e e n d o f t h e a c c o u n t i n g p e r io d , r e g a r d le s s o f t h e c a s h in t h e f u n d R e p l e n is h m e n t a t t h i s t i m e is n e c e s s a r y in o r d e r to r e c o g n iz e t h e e f f e c ts o f t h e p e tt y c a s h p a y m e n t s o n t h e fin a n c ia l s ta t e m e n t s Ethics Insight H o w E m p lo y e e s S te a l Occupational fraud is using your own occupation for personal gain through the misuse or misapplication of the company's resources or assets This type of fraud is one of three types: Asset misappropriation, such as theft of cash on hand, fraudulent disbursements, false refunds, ghost employees, personal purchases, and fictitious employees This fraud is the most common but the least costly Corruption, such as bribery, illegal gratuities, and economic extortion This fraud gener ally falls in the middle between asset misappropriation and financial statement fraud as regards frequency and cost Finandal statement fraud, such as fictitious revenues, concealed liabilities and expenses, improper disclosures, and improper asset values This fraud occurs less frequently than other types of fraud but it is the most costly © Chris Fernig/iStockphoto The graph below shows the frequency and the median loss for each type of occupational fraud O ccu pation al Frauds by Frequ en cy and Loss A s s e t M isappropriation ($130.000) i Financial S ta te m e n t Fraud o ($1,000,000) 40 50 60 70 80 90 100% Perc e n t o f Cases Source: 2014 Report to the Nations on Occupational Fraud and Abuse Association of Certified Fraud Examiners, pp 10-12 Control Features of a Bank Account DOIT! 2b Petty Cash Fund Bateer Company established a $50 petty cash fund on July On July 30, the fund had $12 cash rem aining and petty cash receipts for postage $14 office supplies $10, and delivery expense $15 Prepare joum al entries to establish the fund on July and to replenish the fund on July 30 Solution July Petty Cash Cash (To establish petty cash fund) 50 Postage Expense Supplies Delivery Expense Cash Over and Short Cash ($ -$ ) (To replenish petty cash) 14 Related exercise m aterial: B E8-9, E8-7, E8-8, a n d LEARNING ; OBJEaiVE 50 10 15 oo it i 8-2b Identify the control features of a bank account The use o f a bank trib u tes significantly to g ood internal control over cash A c o m p a n y c a n s a f e g u a r d i ts c a s h b y u s in g a b a n k a s a d e p o s i t o r y a n d a s a c le a r in g h o u s e f o r c h e c k s r e c e iv e d a n d w r i tt e n U s e o f a b a n k m i n i m i z e s t h e a m o u n t o f c u r r e n c y t h a t a c o m p a n y m u s t k e e p o n h a n d A lso , u s e o f a b a n k f a c ilita te s t h e c o n t r o l o f c a s h b e c a u s e i t c r e a t e s a d o u b l e r e c o r d o f a ll b a n k tr a n s a c t i o n s — o n e b y t h e c o m p a n y a n d t h e o t h e r b y t h e b a n k T h e a s s e t a c c o u n t C a s h m a i n t a i n e d b y t h e c o m p a n y s h o u l d h a v e t h e s a m e b a l a n c e a s t h e b a n k ’s lia b ility a c c o u n t f o r t h a t c o m p a n y A bank r eco n cilia tio n c o m p a r e s t h e b a n k ’s b a la n c e w i t h t h e c o m p a n y ’s b a l a n c e a n d e x p la i n s a n y d i f f e r e n c e s to m a k e t h e m a g re e M a n y c o m p a n i e s h a v e m o r e t h a n o n e b a n k a c c o u n t F o r e ffic ie n c y o f o p e r a tio n s a n d b e tt e r c o n tr o l , n a ti o n a l r e t a il e r s lik e W a l- M a r t S t o r e s , I n c a n d T a r g e t m a y h a v e r e g io n a l b a n k a c c o u n ts L a r g e c o m p a n i e s , w i t h t e n s o f t h o u s a n d s o f e m p lo y e e s, m a y h a v e a p a y ro ll b a n k a c c o u n t , a s w e ll a s o n e o r m o r e g e n e r a l b a n k a c c o u n ts A lso, a c o m p a n y m a y m a i n t a i n s e v e r a l b a n k a c c o u n t s in o r d e r to h a v e m o re t h a n o n e s o u r c e f o r s h o r t - te r m lo a n s w h e n n e e d e d Making Bank Deposits A n a u th o r i z e d e m p lo y e e , s u c h a s th e h e a d c a s h ie r, s h o u ld m a k e a c o m p a n y ’s b a n k d e p o s its E a c h d e p o s it m u s t b e d o c u m e n t e d b y a d e p o s it s lip ( tic k e t) , a s s h o w n in I ll u s tr a ti o n 8-8 ( p a g e 37 ) D e p o s it s lip s a r e p r e p a r e d i n d u p lic a te T h e b a n k r e t a in s th e o r ig in a l; th e d e p o s it o r k e e p s t h e d u p lic a te , m a c h i n e - s t a m p e d b y t h e b a n k to e s ta b l is h its a u th e n tic ity Action Plan ^ To establish the fund, set up a separate general ledger account ^ Determine how much cash is needed to replenish the fund: subtract the cash remaining from the petty cash fund balance ^ Total the petty cash receipts Determine any cash over or short—the difference between the cash needed to replenish the fund and the total of the petty cash receipts V Record the expenses incurred according to the petty cash receipts when replenishing the fund 373 ... blocks of accounting: ethics, principles, and assumptions Ethics in Financial Reporting Generally Accepted Accounting Principles Measurement Principles Assumptions LO 3: State the accounting. .. APPENDIX 1A: Explain the career opportunities in accounting 25 Public Accounting 25 Private Accounting 26 Governmental Accounting 26 Forensic Accounting 26 "Show Me the Money" 26 A Look at IFRS... Finance Issues in Accounting Education, Journal of Accounting Education, as well as other journals His research interests include accounting for finan cial instruments and innovation in accounting