Chapter 8-1 Chapter Fraud, Internal Control, and Cash Chapter 8-2 Accounting Principles, Ninth Edition Study Study Objectives Objectives Define fraud and internal control Identify the principles of internal control Explain the applications of internal control principles to cash receipts Explain the applications of internal control principles to cash disbursements Describe the operation of a petty cash fund Indicate the control features of a bank account Prepare a bank reconciliation Explain the reporting of cash Chapter 8-3 Fraud, Fraud, Internal Internal Control, Control, and and Cash Cash Fraud Fraudand and Internal InternalControl Control Cash CashControls Controls Fraud The SarbanesOxley Act Internal control Cash receipts controls Cash disbursements controls Principles of internal control Limitations Chapter 8-4 Control Control Features: Features:Use Useof of aaBank Bank Reporting ReportingCash Cash Making deposits Writing checks Cash equivalents Restricted cash Bank statements Reconciling the bank account Electronic funds transfer (EFT) system Compensating balances Fraud Fraud and and Internal Internal Control Control Fraud Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer Illustration 8-1 Why does fraud occur? Chapter 8-5 SO Define fraud and internal control Chapter 8-6 Fraud Fraud and and Internal Internal Control 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) Chapter 8-7 SO Define fraud and internal control Fraud Fraud and and Internal Internal Control Control Internal Control Methods and measures adopted to: Safeguard assets Enhance accuracy and reliability of accounting records Increase efficiency of operations, and Ensure compliance with laws and regulations Under the Sarbanes-Oxley Act, all publicly traded U.S corporations are required to maintain an adequate system of internal control Chapter 8-8 SO Define fraud and internal control Fraud Fraud and and Internal Internal Control Control Internal Control Internal control systems have five primary components A control environment Risk assessment Control activities Information and communication Monitoring Chapter 8-9 SO Define fraud and internal control Fraud Fraud and and Internal Internal Control 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: Chapter 8-10 Establishment of responsibility Segregation of duties Documentation procedures Physical controls Independent internal verification Human resource controls SO Identify the principles of internal control Control Control Features: Features: Use Use of of aa Bank Bank Bank Statements Illustration 8-10 Debit Memorandum Bank service charge NSF (not sufficient funds) Credit Memorandum Collect notes receivable Interest earned Chapter 8-36 SO Indicate the control features of a bank account Control Control Features: Features: Use Use of of aa Bank Bank Review Question The control features of a bank account 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 Chapter 8-37 d safeguarding cash by using a bank as a depository SO Indicate the control features of a bank account Control Control Features: Features: Use Use of of aa Bank Bank Reconciling the Bank Account Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances Reconciling Items: Deposits in transit Outstanding checks Errors Bank memoranda Chapter 8-38 SO Prepare a bank reconciliation Control Control Features: Features: Use Use of of aa Bank Bank Reconciliation Procedures Illustration 8-11 + Deposit in Transit + Notes collected by bank - - NSF (bounced) checks - Check printing or other service charges Outstanding Checks +- Bank Errors +- Company Errors CORRECT BALANCE Chapter 8-39 CORRECT BALANCE SO Prepare a bank reconciliation Control Control Features: Features: Use Use of of aa Bank Bank Illustration: The bank statement for Laird Company (Illustration 8-10), shows a balance per bank of $15,907.45 on April 30, 2010 On this date the balance of cash per books is $11,589.45 Using the four reconciliation steps, Laird determines the following reconciling items Chapter 8-40 Control Control Features: Features: Use Use of of aa Bank Bank Illustration: a) Prepare a bank reconciliation at April 30 Cash balance per bank statement $15,907.45 Add: Deposit in transit 2,201.40 Less: Outstanding checks (5,904.00) Adjusted cash balance per bank $12,204.85 Cash balance per books $11,589.45 Add: Error in recording check no 443 36.00 Collection of notes + interest - fee 1,035.00 Less: NSF check (425.60) Bank service charge (30.00) Adjusted cash balance per books Chapter 8-41 $12,204.85 Illustration 8-12 SO Prepare a bank reconciliation Control Control Features: Features: Use Use of of aa Bank Bank The company records each reconciling item used to determine the adjusted cash balance per books Collection of Note Receivable: Assuming interest of $50 has not been accrued and collection fee is charged to Miscellaneous Expense, the entry is: Apr 30 Cash 1,035.00 Miscellaneous expense 15.00 Notes receivable 1,000.00 Interest revenue 50.00 Chapter 8-42 SO Describe the operation of a petty cash fund Control Control Features: Features: Use Use of of aa Bank Bank Book Error: The cash disbursements journal shows that check no 443 was a payment on account to Andrea Company, a supplier The correcting entry is: Apr 30 Cash 36.00 Accounts payable 36.00 Chapter 8-43 SO Describe the operation of a petty cash fund Control Control Features: Features: Use Use of of aa Bank Bank NSF Check: As indicated earlier, an NSF check becomes an account receivable to the depositor The entry is: Apr 30 Accounts receivable 425.60 Cash 425.60 Bank Service Charges: Depositors debit check printing charges (DM) and other bank service charges (SC) to Miscellaneous Expense The entry is: Apr 30 Chapter 8-44 Miscellaneous Cash 30.00 30.00 SO Describe the operation of a petty cash fund Control Control Features: Features: Use Use of of aa Bank 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 Chapter 8-45 SO Prepare a bank reconciliation Control Control Features: Features: Use Use of of aa Bank Bank Electronic Funds Transfers (EFT) 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 Chapter 8-46 SO Prepare a bank reconciliation Control Control Features: Features: Use Use of of aa Bank Bank Discussion Question Q8-23 Lori Figgs is confused about the lack of agreement between the cash balance per books and the balance per the bank Explain the causes for the lack of agreement to Lori, and give an example of each cause See notes page for discussion Chapter 8-47 SO Prepare a bank reconciliation Reporting Reporting Cash 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 8-14 Cash equivalents Restricted cash Compensating balances Chapter 8-48 SO Explain the reporting of cash Reporting Reporting Cash 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 Chapter 8-49 SO Explain the reporting of cash Copyright Copyright “Copyright © 2009 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” Chapter 8-50 .. .Chapter Fraud, Internal Control, and Cash Chapter 8-2 Accounting Principles, Ninth Edition Study Study Objectives Objectives Define fraud and internal control Identify the principles. .. accounted for Chapter 8-11 SO Identify the principles of internal control Fraud Fraud and and Internal Internal Control Control Principles of Internal Control Activities PHYSICAL CONTROLS Chapter. .. does fraud occur? Chapter 8-5 SO Define fraud and internal control Chapter 8-6 Fraud Fraud and and Internal Internal Control Control The Sarbanes-Oxley Act Companies must develop principles of control