Chapter 7 Notes
Chapter 7 Notes BA 210
Popular in Financial Accounting
Popular in Business
This 12 page Class Notes was uploaded by Amelia Cassidy on Tuesday March 8, 2016. The Class Notes belongs to BA 210 at Embry-Riddle Aeronautical University - Daytona Beach taught by Dr. Greenman in Spring 2016. Since its upload, it has received 56 views. For similar materials see Financial Accounting in Business at Embry-Riddle Aeronautical University - Daytona Beach.
Reviews for Chapter 7 Notes
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 03/08/16
Chapter 7 Fraud, Internal Control, and Cash ● Fraud and Internal Control ○ Fraud ■ Fraud Definition ● Dishonest act by an employee that results in personal benefit to him/her at the cost to employer ■ Fraud Triangle Definition ● Three factors that contribute to fraudulent activity by employees: opportunity, financial pressure, and rationalization ● Opportunity ○ Occur when workplace lacks sufficient controls to deter/detect fraud ● Financial Pressure ○ Personal financial problems caused by too much debt ○ Want to lead lifestyle they can’t afford on current salary ● Rationalization ○ Justify fraud because they believe they are underpaid while employer is making lots of money ○ SarbanesOxley Act ■ SarbanesOxley Act Definition ● Regulations passed by Congress to try to reduce unethical corporate behaviour ○ Internal Control ■ Internal Control Definition ● All related methods/activities adopted within an organization to safeguard its assets and enhance the accuracy/reliability of its accounting records ● Control Environment ○ Tone at the top ○ Organization values integrity unethical activity is not tolerated ● Risk Assessment ○ Companies identify/analyze various factors that create risk for the business and must determine how to manage them ● Control Activities ○ Reduce occurrence of fraud, management must design policies/procedures to address risks faced by the company ● Information and Communication ○ Capture/Communicate all pertinent info both up & down the organization, as well as communicate info to appropriate external parties ● Monitoring ○ Monitored periodically for adequacy ○ Significant deficiencies need to be reported to top mgmt and/or board of directors ○ Principles of Internal Control Activities ■ Establishment of Responsibility ● Control is most effective when only one person is responsible for given task ■ Segregation of Duties ● Two common applications ○ Different individuals should be responsible for related activities ○ Responsibility for recordkeeping for an asset should be separate from physical custody of that asset ● The work of one employee should, without duplication of effort, provide a reliable basis for evaluating the work of another employee ● Segregation of Related Activities ○ Making one individual responsible for related activities increases potential for errors/irregularities ● Segregation of RecordKeeping From Physical Custody ○ Custodian of the asset is not likely to convert asset to personal use when one employee maintains the record of the asset, and a different employee has physical custody of the asset ■ Documentation Procedures ● Companies should use prenumbered documents, and all should be accounted for ● Control system should require that employees promptly forward source documents for accounting entries to the accounting department ○ Helps ensure timely recording of transaction ■ Physical Controls ● Safeguarding of assets and enhancing accuracy/reliability of accounting records ■ Independent Internal Verification ● Review of data prepared by employees ● Verify records periodically or on surprise basis ● An employee who is independent of personnel responsible for information should make verification ● Discrepancies/Exceptions should be reported to management level that can take appropriate corrective action ● Internal Auditors Definition ○ Company employees who continuously evaluate the effectiveness of the company’s internal control system ■ Human Resource Controls ● Bond employees who handle cash ○ Bonding Definition ■ Obtaining insurance protection against misappropriation of assets by employees ● Rotate employees’ duties and require employees to take vacations ● Conduct thorough background checks ○ Limitations of Internal Control ■ Reasonable Assurance ● Costs of establishing control procedures should not exceed expected benefit ■ Human Element ● Employee fatigue, carelessness, indifference ■ Collusion ● Reduce effectiveness of system, eliminating protection offered by segregation of duties ● Cash Controls ○ Cash is the asset most susceptible to fraudulent activities ○ Cash Receipts Controls ■ OvertheCounter Receipts ● Supervisor has access to register tape but not cash ● Clerk/Cashier have access to cash but not register tape ■ Mail Receipts ● Opened in presence of two + mail clerks ● In form of checks ● Excellent internal control ○ Cash Disbursement Controls ■ Generally, internal control over cash disbursements is more effective when companies pay by check rather than by cash ● Exception = incidental amounts paid out of petty cash ■ Voucher System Controls ● Voucher System Definition ○ Network of approvals by authorized individuals acting independently to ensure that all disbursements by check are proper ● Voucher Definition ○ An authorization form prepared for each payment in a voucher system ● Improves internal control over cash disbursements ● Keeps track of documents that back up each transaction ■ Petty Cash Fund Controls ● Petty Cash Fund Definition ○ A cash fund used to pay relatively small amounts ● Operations ○ Calledmprest System ■ Establish fund ■ Make payments from fund ■ Replenish fund ● Establishing the Petty Cash Fund ○ Appoint petty cash custodian ○ Determine size of fund ● Making Payments from the Petty Cash Fund ○ Company does not make accounting entries to record payments from petty cash ■ Recognize accounting effects of each payment when replenishing fund ● Replenishing the Petty Cash Fund ○ Prepares schedule/summary of payments, support them w/receipts ● Control Features: Use of a Bank ○ Use of a bank contributes significantly to good internal control over cash ○ Bank Reconciliation Definition ■ Process of comparing the bank’s balance of an account with the company’s balance and explaining any difference to make them agree ○ Making Bank Deposits ○ Writing Checks ■ Check Definition ● Written order signed by a bank depositor, directing the bank to pay a specified sum of money to a designated recipient ■ 3 parties: ● The maker/drawer issues the check ● Bank/payer the check is drawn ● Payee to whom the check is payable ■ A check is a negotiable instrument one party can transfer to another by endorsement ○ Bank Statements ■ Bank Statement Definition ● Monthly statement from the bank that shows the depositor’s bank transactions and balances ■ Shows: ● Checks paid/other debits that reduce the balance in the depositor’s account ● Deposits/Other credits that increase that balance in account ● Account balance after each day’s transactions ■ Paid check =Canceled check ■ Debit Memorandum ● Bank Service Charge Definition ○ Fee charged by a bank for use of its services ● Not Sufficient Funds (NSF) Definition ○ Check that is not paid by a bank because of insufficient funds in a customer’s bank account ■ Credit Memorandum ● Collect notes receivable ● Interest earned ○ Reconciling the Bank Account ■ Make the balance per books and balance per bank agree with the correct/true amount ■ Two Causes ● Time Lags prevent one party from recording transaction in the same period as other party ● Errors by either party in recording transactions ■ Reconciliation Procedure ● Bank reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash ● Deposits in Transit Definition ○ Deposits recorded by depositor but not yet recorded by the bank ● Outstanding Checks Definition ○ Checks issued and recorded by a company but not yet paid by the bank ● Errors ○ All errors made by depositor are reconciling items in determining adjusted cash balance per books ● Bank Memoranda ■ Bank Reconciliation Illustrated ■ Entries from Bank Reconciliation ● If company does not journalize/post items, Cash account will not show correct balance ○ Electronic Funds Transfer (EFT) System ■ EFT Definition ● Disbursement system that uses wire, telephone, or computers to transfer funds from one location to another ■ Better internal control since no cash.checks are handled by company employees ● Reporting Cash ○ Cash Definition ■ Resources that consist of coins, currency, checks, money, orders, and money on hand or on deposit in a bank or similar depository ■ Reported in Balance Sheet and Statement of Cash Flows ○ Cash Equivalents ■ Cash Equivalents Definition ● ShortTerm, highly liquid investments that can be converted to a specific amount of cash ● So near to maturity that market value is relatively insensitive to interest rate changes ○ Restricted Cash ■ Restricted Cash Definition ● Cash that must be used for a special purpose ■ If company wants to use restricted cash within next year, must be reported a urrent Asset
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'