Chapter – 8: Fraud, Chapter – 8: Fraud, Internal Control & CashInternal Control & Cash

FraudFraud

The Sarbanes-The Sarbanes-Oxley ActOxley Act

Internal controlInternal control

Principles of Principles of internal controlinternal control

LimitationsLimitations

Cash equivalentsCash equivalents

Restricted cashRestricted cash

Compensating Compensating balancesbalances

Making depositsMaking deposits

Writing checksWriting checks

Bank statementsBank statements

Reconciling the Reconciling the bank accountbank account

Electronic funds Electronic funds transfer (EFT) transfer (EFT) systemsystem

Cash receipts Cash receipts controlscontrols

Cash Cash disbursements disbursements controlscontrols

Fraud and Fraud and Internal ControlInternal ControlFraud and Fraud and Internal ControlInternal Control Cash ControlsCash ControlsCash ControlsCash Controls

Control Control Features: Use of Features: Use of a Banka Bank

Control Control Features: Use of Features: Use of a Banka Bank

Reporting CashReporting CashReporting CashReporting Cash

Fraud, Internal Control, and CashFraud, Internal Control, and CashFraud, Internal Control, and CashFraud, Internal Control, and Cash

Control Features: Use of Control Features: Use of BanksBanksContributes to good internal control

over cash◦Minimizes the amount of currency on

hand◦Creates a double record of bank

transactions◦Bank reconciliation

Some payments are so small that companies pay them from a different cash account called petty cash

Control Features: Use of Control Features: Use of BanksBanksDeposit can be done through:

◦Cash: In cash counter of bank◦Check: In clearing section of bank

Requires a deposit slip

Control Features: Use of Control Features: Use of BanksBanksMedium to large amount of

payments can be done through writing checks.

Control Features: Use of Control Features: Use of BanksBanksA bank statement shows the account

holder’s bank transactions and balances for a certain period of time. ◦ Transactions that increase bank balance

are recorded in the credit side◦ Transactions that decrease bank balance

are recorded in the debit sideBank service charges are recorded in

the statement and also a debit memorandum is attached with it

Notes Receivables collection and Interest earned are recorded in the statement and a credit memorandum is attached with it

Bank ReconciliationBank Reconciliation

Bank ReconcilliationBank ReconcilliationReconcile balance per books and

balance per bank to their adjusted (corrected) cash balances.

Reconciling Items:

1.Deposits in transit.

2.Outstanding checks.

3.Errors.

4.Bank memoranda.

Bank ReconciliationBank ReconciliationReconciliation Procedures

+ Deposit in Transit

- Outstanding Checks

+- Bank Errors

+ Notes collected by bank

- NSF (bounced) checks

- Check printing or other service charges

+- Company Errors

CORRECT BALANCE CORRECT BALANCE

Bank ReconciliationBank ReconciliationExample: Example: The bank statement for Laird Company 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.

Bank ReconciliationBank ReconciliationExample: Example: 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

Collection of notes + interest - fee 1,035.00

Add: Error in recording check no. 443 36.00

Less: NSF check (425.60)

Bank service charge (30.00)

Adjusted cash balance per books $12,204.85

Adjusting EntriesAdjusting EntriesThe 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:

Cash 1,035.00Apr. 30

Miscellaneous expense 15.00

Notes receivable1,000.00Interest revenue

50.00

Adjusting EntriesAdjusting Entries

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:

Cash 36.00Apr. 30

Accounts payable36.00

Adjusting EntriesAdjusting Entries

NSF Check: As indicated earlier, an NSF check becomes an account receivable to the depositor. The entry is:

Accounts receivable 425.60Apr. 30

Cash425.60

Bank Service Charges: Depositors debit check printing charges (DM) and other bank service charges (SC) to Miscellaneous Expense. The entry is:

Miscellaneous 30.00Apr. 30

Cash30.00