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7
FRAUD, INTERNAL
CONTROL, AND CASH
7-2
Accounting, Fourth Edition
Study Objectives
7-3
Fraud, Internal Control, and Cash
7-4
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
Internal Control
Methods and measures adopted to:
1. Safeguard assets.
Internal Control
Five Primary Components:
1. Control environment.
2. Risk assessment.
3. Control activities.
5. Monitoring.
Segregation of Duties
Related duties should be assigned to different individuals.
Documentation Procedures
Companies should use prenumbered documents and all
documents should be accounted for.
Physical
Controls
Illustration 7-4
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SO 3
Cash Controls
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SO 3
Illustration 7-5
Cash
Receipts
Controls
Over-the-Counter
Receipts
Important internal
control principle—
segregation of
record-keeping from
physical custody.
Mail Receipts:
Mail receipts should be opened by two people, a list
prepared, and each check endorsed.
Each mail clerk signs the list to establish responsibility
for the data.
Original copy of the list, along with the checks, is sent
to the cashier’s department.
Copy of the list is sent to the accounting department for
recording. Clerks also keep a copy.
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. other controls.
Applications:
Voucher system
Petty cash fund
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SO 4 Explain the applications of internal control
principles to cash disbursements.
Cash Controls
Cash Disbursements
Controls
Illustration 7-6
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SO 4
Cash Controls
Cash Disbursements
Controls
Illustration 7-6
7-23
SO 4
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Cash 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.
d. documentation procedures.
7-25
SO 4 Explain the applications of internal control
principles to cash disbursements.
Cash 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.
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SO 4 Explain the applications of internal control
principles to cash disbursements.
Cash Controls
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SO 4 Explain the applications of internal control
principles to cash disbursements.
Control Features: Use of a Bank
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Control Features: Use of a Bank
Illustration 7-7
Bank Statements
Debit Memorandum
Bank service charge
NSF (not sufficient
funds)
Credit Memorandum
Collect notes
receivable.
Interest earned.
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Control Features: Use of a Bank
Review Question
The control features of a bank account do not include:
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Control Features: Use of a Bank
4. Errors.
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.
Review Question
Which of the following statements correctly describes the
reporting of cash?
Cash Budget
► Shows anticipated
cash flows,
usually over a
one- to two-year
period.
► Contributes to
more effective
cash
management.
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SO 8 Identify the primary elements of a cash budget.
Appendix
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Key Points
Globally, the number of companies reporting fraud increased
from 37% to 45% since 2003, a 22% increase. The cost to
companies was an average US$1.7 million in losses from
“tangible frauds,” that is, those that result in an immediate and
direct financial loss.
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Looking into the Future
High-quality international accounting requires both high-quality
accounting standards and high-quality auditing. Similar to the
convergence of GAAP and IFRS, there is movement to improve
international auditing standards. The International Auditing and
Assurance Standards Board (IAASB) functions as an
independent standard-setting body. It works to establish high-
quality auditing and assurance and quality-control standards
throughout the world. Whether the IAASB adopts internal
control provisions similar to those in SOX remains to be seen.
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Non-U.S companies that follow IFRS:
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Which of the following is the correct accounting under IFRS
for cash?
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