Lecture 6-Fraud, Internal Control, and Cash Flashcards
Fraud and Internal Control-Fraud
Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.
Fraud and Internal Control-Internal Control
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.
Internal Control-Five Primary Components
- Control environment.
- Risk assessment.
- Control activities.
- Information and communication.
- Monitoring.
Principles of Internal Control Activities-Establishment of Responsibility
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
Principles of Internal Control Activities Segregation of Duties
Different individuals should be responsible for related activities
* Responsibility for record-keeping for an asset should be separate from physical custody of that asset
Principles of Internal Control Activities Documentation Procedure
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
Principles of Internal Control Activities Independent Internal Verification
Records periodically verified by an employee who is independent
* Discrepancies reported to management
Principles of Internal Control Activities
Human Resource Controls
Bond employees who handle cash
* Rotate employees’ duties and require vacations * Conduct background checks
Limitations of Internal Control
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.
Principles of Internal Control
Review Question
The principles of internal control do not include: a. establishment of responsibility.
b. documentation procedures.
c. management responsibility.
d. independent internal verification.
Cash Controls
Cash Receipts Controls
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
Cash Receipt Controls -Cash Disbursement 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
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
Voucher System Controls
- 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
Petty cash Fund
Petty Cash Fund- Used to pay small amounts. Involves:
1. establishing the fund
2. making payments from the fund
3. replenishing the fund
Making Payments From Petty Cash
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