Lecture 6-Fraud, Internal Control, and Cash Flashcards

1
Q

Fraud and Internal Control-Fraud

A

Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.

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2
Q

Fraud and Internal Control-Internal Control

A

Purposes of internal control:
1. Safeguard assets.
2. Enhance accuracy and reliability of accounting records.
3. Increase efficiency of operations.
4. Ensure compliance with laws and regulations.

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3
Q

Internal Control-Five Primary Components

A
  1. Control environment.
  2. Risk assessment.
  3. Control activities.
  4. Information and communication.
  5. Monitoring.
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4
Q

Principles of Internal Control Activities-Establishment of Responsibility

A

Control is most effective when only one person is responsible for a given task
* Establishing responsibility often requires limiting access only to authorized personnel, and then identifying those personnel

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5
Q

Principles of Internal Control Activities Segregation of Duties

A

Different individuals should be responsible for related activities
* Responsibility for record-keeping for an asset should be separate from physical custody of that asset

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6
Q

Principles of Internal Control Activities Documentation Procedure

A

Companies should use prenumbered documents, and all documents should be accounted for
* Employees should promptly forward source documents for accounting entries to the accounting department

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7
Q

Principles of Internal Control Activities Independent Internal Verification

A

Records periodically verified by an employee who is independent
* Discrepancies reported to management

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8
Q

Principles of Internal Control Activities
Human Resource Controls

A

Bond employees who handle cash
* Rotate employees’ duties and require vacations * Conduct background checks

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9
Q

Limitations of Internal Control

A

Costs should not exceed benefit
* Human element
* Size of the business

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 stockroom as lower risk. Thus, management would have stricter controls for cash.

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9
Q

Principles of Internal Control
Review Question

A

The principles of internal control do not include: a. establishment of responsibility.
b. documentation procedures.
c. management responsibility.
d. independent internal verification.

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10
Q

Cash Controls
Cash Receipts Controls

A

Establishment of Responsibility:
 Only designated personnel are authorized to handle cash receipts
* Segregation of Duties: Different individuals
 Receive cash
 Record cash receipts  Hold cash

Documentation Procedures: Use
 Remittance advice (mail receipts)
 Cash register tapes or computer records
 Deposit slips
* Physical Controls
 Store cash in safes and bank vaults
 Limit access to storage areas
 Use cash registers or point-of-sale terminals

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

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11
Q

Cash Receipt Controls -Cash Disbursement Controls

A

Establishment of Responsibility
 Only designated personnel are authorized to sign checks (treasurer) and approve vendors

  • Segregation of Duties
     Different individuals approve and make payments
     Check-signers do not record disbursements

Documentation Procedures
 Use prenumbered checks and account for sequence
 Each check must have an approved invoice
 Require employees to use corporate credit cards for reimbursable expenses
 Stamp invoices “paid”

  • 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

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12
Q

Voucher System Controls

A
  • A network of approvals by authorized individuals, acting independently, to ensure all disbursements by check are proper
  • A voucher is an authorization form prepared for each expenditure in a voucher system
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13
Q

Petty cash Fund

A

Petty Cash Fund- Used to pay small amounts. Involves:
1. establishing the fund
2. making payments from the fund
3. replenishing the fund

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14
Q

Making Payments From Petty Cash

A

Management usually limits the size of expenditures
* Does not permit use of fund for certain types of transactions
* Payments are documented on a prenumbered receipt
* Signatures of both the custodian and the individual receiving payment are required on the receipt
* Supporting documents should be attached to receipt
Custodian keeps receipts in petty cash box until fund is replenished
* Sum of receipts and money in fund should equal established total at all times

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15
Q

Control Features of a Bank Account

A

Use of a bank contributes significantly to good internal control over cash.
* Minimizes amount of currency on hand
* Creates a double record of bank transactions
* Bank reconciliation

Helpful Hint Essentially, the bank statement is a copy of the bank’s records sent to the customer or made available online for review.

16
Q

Writing Checks

A

Written order signed by depositor directing bank to pay a specified sum of money to a designated recipient.

17
Q

Electronic Funds Transfer (EFT) System

A

Disbursement systems that use wire, telephone, or computers to transfer cash from one location to another
* Use is quite common
* Normally result in better internal control since no cash or checks are handled by company employees

18
Q

Bank Statements

A

Prepared from bank’s perspective
* Every deposit bank receives is an increase in bank’s liabilities (an account payable to the depositor)
* Lists in numerical sequence all paid checks along with date check was paid and its amount
* Bank includes with bank statement memoranda explaining other debits and credits it made to depositor’s account
* A check that is not paid by a bank because of insufficient funds in a bank account is called an NSF check (not sufficient funds)

Each month, the company receives from the bank a bank statement showing its bank transactions and balances

19
Q

Bank Statements-all the items

A

Shows the following:
1. Checks paid and other debits that reduce the balance.
* Debit card transactions
* Electronic funds transfers for bill payments
2. Deposits and other credits that increase the balance.
* Direct deposit
* Automated teller machine
* Electronic funds transfer
3. Debit Memorandum.
* Bank service charge
* N S F check (not sufficient funds)
4. Credit Memorandum.
* Collection of a notes receivable
* Interest earned
5. The account balance after each day’s transactions.

20
Q

Bank statements-The control features of a bank account do not include

A

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.

21
Q

Reconciling the Bank Account

A

Reconcile balance per books and balance per bank to their “correct or true” balance. Reconciling Items:
1. Time Lags
* Deposits in transit
* Outstanding checks
* Bank memoranda
2. Errors 57 C

22
Q

Reconciling the Bank Account

A

Reconciliation Procedure
Cash Balance Per Bank + Deposits in transit
Outstanding checks
+/- Bank errors

Cash Balance Per Books
+ EFT collections and other deposits-
- NSF (bounced) checks
Service charges and other Payments +/- Company errors

Corrected Balance Corrected Balance

23
Q

Bank Reconciliation
Review Question:

A

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.

23
Q

Reporting of Cash

A

Cash consists of coins, currency (paper money), checks, money orders, and money on hand or deposit
* The statement of financial position reports amount of cash available at a given point in time  Listed first in current assets section
* Statement of cash flows shows sources and uses of cash during a period of time

24
Q

Reporting Cash
Cash Equivalents

A

Cash equivalents are short-term, highly liquid investments that are both:
1. Readily convertible to known amounts of cash, and
2. So near their maturity that their market value is relatively insensitive to changes in interest rates.

Restricted Cash Cash that is not available for general use.

25
Q

Reporting Cash
Review Question

A

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.

26
Q

A Look at U.S. GAAP Key Point

A

The fraud triangle discussed in this chapter is applicable to all international companies. Some of the major frauds on a U.S. basis are Enron (USA), WorldCom (USA), and more recently the Bernie Madoff Ponzi scheme.
* Internal controls are a system of checks and balances designed to prevent and detect fraud and errors. While most companies have these systems in place, many have never completely documented them, nor had an independent auditor attest to their effectiveness.
* Companies find that internal control review is a costly process but badly needed. One study estimates the cost of SOX compliance for U.S. companies at over $35 billion, with audit fees doubling in the first year of compliance. At the same time, examination of internal controls indicates lingering problems in the way companies operate.

27
Q

A Look at U.S. GAAP
Key Points
Similarities

A

Accounting scandals both in the United States and internationally have re-ignited the debate over the relative merits of GAAP, which takes a “rules-based” approach to accounting, versus IFRS, which takes a “principles-based” approach. The FASB announced that it intends to introduce more principles-based standards.
* The accounting and internal control procedures related to cash are essentially the same under both GAAP and IFRS. In addition, the definition used for cash equivalents is the same.
-Most companies report cash and cash equivalents together under GAAP, as shown in this text. In addition, GAAP follows the same accounting policies related to the reporting of restricted cash.
* GAAP and IFRS define cash and cash equivalents similarly as follows.
 Cash is comprised of cash on hand and demand deposits.
 Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

28
Q

A Look at U.S. GAAP
Key Points
Differences

A

-After numerous company scandals, the U.S. Congress passed the Sarbanes-Oxley Act (SOX). Under SOX, all publicly traded U.S. corporations are required to maintain an adequate system of internal control.
* As a result of SOX, company executives and boards of directors must ensure that internal controls are reliable and effective. In addition, independent outside auditors must attest to the adequacy of the internal control system.
* SOX created the Public Company Accounting Oversight Board (PCAOB) to establish auditing standards and regulate auditor activity.

29
Q

A Look at U.S. GAAP
Looking to the Future

A

Ethics has become a very important aspect of reporting. Different cultures have different perspectives on bribery and other questionable activities, and consequently penalties for engaging in such activities vary considerably across countries. 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. Under proposed new standards for financial statements, companies would not be allowed to combine cash equivalents with cash. Copyright ©2019 John Wiley & Son, Inc.