Bài giảng Financial Accounting - Chapter 7: Fraud, internal control, and cash

FRAUD, INTERNAL CONTROL, AND CA$H71201Lec07.PPTX all the related methods and measures adopted within a business to:safeguard its assets - Employee and external theft, unauthorized useenhance accuracy and reliability of accounting of its accounting records. - Mistakes, errors, fraudulent misrepresentations2Internal Control consist of . . . . .Applies to publicly traded U.S. corporations. Required to maintain a system of internal control.Corporate executives and boards of directors must ensure that these controls are reliable and effective. Independent outside auditors must attest to the adequacy of the internal control system.SOX created the Public Company Accounting Oversight Board (PCAOB).Fraud and Internal ControlThe Sarbanes-Oxley Act (2002)3Accounting has several “branches” or areas of specialization. - Bookkeeping - Auditing - Tax - Advisory services, consultingIn an audit, CPA’s evaluate a company’s internal controls to determine how much to check out. - They also use this to provide their published opinion on the reliability of the accounting reporting system.Consultants suggest improvements to systems. Accountants and Internal Controls4FraudDishonest act by management or employee that results in personal benefit at a cost to the employer.Three factors that contribute to fraudulent activity.5Example: Konk Co makes cash sales to customers. Employees sell product, collect cash, deposit the cash in the bank and record the transactions in the accounting records.How could the company be ripped off? By whom and when. Also think of how they could get caught. The 6 IC PRINCIPLESEstablish responsibility centersMake individuals or specific groups accountable for specific tasks under their control Example: One cashier per register.At end of shift, agree cash received to register tape.If differences, cashier is responsible.6Segregate employee duties. Don’t allow only one person to have both: - Physical custody (or authority over) of asset - Record transactions related to assetIncludes separating a series of related activities.Goal is to have many employees involved so no one can execute and cover up an error or irregularity. Example: Cashier forwards register tape to accountant.Accountant records in books but never has access to cash.Cashier AccountantTypically someone else deposits cash in bank daily.7Independent Internal verificationPeriodic management reviewSupervision of daily activitiesExample: Supervisor agrees some of the cashier’s tapes to accounting entriesSupervisor reconciles bank deposits to book debits to cashAccountantCashierReview-verify8Documentation to provide an audit trail Provide verifiable evidence of transactionsPre-number and account for all items in sequenceOriginators and reviewers sign-off to indicate responsibilityMatch related documents, time stamp & secure after processing is completeExamples: Sales and Purchase orders (PO), Invoices, Receiving & shipping sheets, bills of lading9Physical, mechanical and electronic control over assets, Data security Examples: Password access Locks, guards, alarms Data back-up Virus protection Anti-theft systems, scanners Limited authorized check signersHuman resource control Examples: Bonding of employees, background checks, rotation of duties, required vacations, approved vendor lists and prices, internal and external independent audits, etc, etc10Costs should not exceed benefit.Human element. Breakdown of procedures, collusionSize of the business. Not able to separate duties, etc Limitations of Internal Control11provides a double record of all bank transactionsone by the businessone by the bank Requires monthly reconciliation of bank account to book cash accountIdentifies errors, missing items on books or bank12Control Features: Use of a BankBALANCE PER BANKBALANCE PER BOOKS + Deposits In Transit + Credit Memos - Outstanding Checks - Debit Memos + - Other + - OtherADJUSTED BALANCEADJUSTED BALANCE Make journal entry based on items that ha ven’t been recorded yet (That is, the balance per books side). Balance sheet will show the Adjusted Balance.Items Bank doesn’t knowItems Books don’t know13EXAMPLE:Bank Statement Beginning Balance on 1/01/16 8700Deposits: 1/1/16 = 1200, 1/6/16 = 3200, 1/16/16 = 2000, 1/23/16 = 2800, 1/28/16 = 1600 10800Checks: #123 500 #128* 420 #124 1000 #130* 125 #125 650 #133* 800 #126 350 #134 445 -4290Other: Bank Charges- Debit Memo 15. -15Bank Statement Ending Balance on 1/31/16 15195 Cash in checking 1/1/16 Bal 84001/06/16 32001/16/16 20001/23/16 28001/28/16 16001/31/16 2200#125 650#126 350#127 2000#128 420#129 60#130 125#131 750#132 440#133 800#134 454Confirm cash debit last DecemberJanuary DIT1/31/16 Bal 1415114EXAMPLE:Bank Statement Beginning Balance on 1/01/16 8700Deposits: 1/1/16 = 1200, 1/6/16 = 3200, 1/16/16 = 2000, 1/23/16 = 2800, 1/28/16 = 1600 10800Checks: #123 500 #128* 420 #124 1000 #130* 125 #125 650 #133* 800 #126 350 #134 445 -4290Other: Bank Charges- Debit Memo 15. -15Bank Statement Ending Balance on 1/31/16 15195 Cash in checking 1/31/16 Bal 141511/1/16 Bal 84001/06/16 32001/16/16 20001/23/16 28001/28/16 16001/31/16 2200#125 650#126 350#127 2000#128 420#129 60#130 125#131 750#132 440#133 800#134 454Confirm o/s checks last month. Also look for last month that are still o/s.January outstanding checksTotal = 325015EXAMPLE:Bank Statement Beginning Balance on 1/01/16 8700Deposits: 1/1/16 = 1200, 1/6/16 = 3200, 1/16/16 = 2000, 1/23/16 = 2800, 1/28/16 = 1600 10800Checks: #123 500 #128* 420 #124 1000 #130* 125 #125 650 #133* 800 #126 350 #134* 445 -4290Other: Bank Charges- Debit Memo 15. -15Bank Statement Ending Balance on 1/31/16 1519516 BANK 15195. BOOKS 14151. + DIT 2200. - O/S Checks 3250. - Debit Memos 15.+ Other 9.ADJ BALANCE 14145.ADJ BALANCE 14145.Bank Fees Expense 15. Cash 15.Cash 9. XXXXXX 9. 17Budget for shortages Prepare Cash Budget Minimize working capital needs:Speed up A/R collectionsDelay A/P paymentsInvest idle cashConsider long range needsInvesting activities such as equipment replacement18Managing CashPlanning the company's cash needs is a key business activity.Cash budget shows future estimates of:Expected cash receivedProjected cash spentAnticipated shortages (need to borrow)The Cash BudgetCash budget format: Monthly, quarterly or annually Begin cash+ Cash received Available cash- Cash disbursedExcess(deficiency)+ borrowing- repayments End cashSay sale terms are all n/30. Look at projected May sales for June receipts.Assume May sales = $800,000.June sales = $1,200,000ExampleJune 16 $100,000+ Cash received + 800,000 $900,000Cash budget format: Monthly, quarterly or annuallyPeriod 1 Begin cash+ Cash received Available cash- Cash disbursedExcess(deficiency)+ borrowing- repayments End cashExampleJune 16 $100,000+ Cas received + 800,000 $900,000- Cash disbursedSay ½ payments are due n/30. Other ½ are due upon receipt.Look at May and June expenses. Assume: May exp = $760,000 June exp = $1,100,000½ x 760,000 = $380,000½ x 1,100,000= $550,000 - 930,000 - $ 30,000 Cash budget format: Monthly, quarterly or annuallyPeriod 1 Begin cash+ Cash received Available cash- Cash disbursedExcess(deficiency)+ borrowing- repayments End cashExampleJune 16 $100,000 + 800,000 $900,000- 930,000- $ 30,000+ 80,000- 0 $ 50,000Assume the company would like a minimum balance in cash of $50,000.System used for items which can’t be paid by check or it’s more convenient to pay cash.Establish a Fund with a fixed contribution.23Petty Cash Petty Cash xxxx Cash xxxx Sets up the fund initially. Use cash to pay for items. Get receipts. No journal entries made at this time. As cash in fund gets low, replenish fund from checking account. Make journal entry: Postage Expense xxxx Supply Expense xxxx Travel Expense xxxx Cash short/over xxxx or xxxx Cash xxxx Records expenses and replenishment of cash in the fund.24