Chapter 8 Fraud, Internal Control, Cash

Fraud What contributes to fraud? – Opportunity – Financial Pressure – Rationalization

Six Principles of Control Establishment of responsibility Segregation of duties Documentation procedures Physical controls Independent internal verification Human resource control

Anatomy of a Fraud Page 350 – Establishment of Responsibility Page 351 – Segregation of Duties Page 352 – Documentation Procedures Page 351 – Physical Controls Page 352 – Physical Controls Page 354 – Independent Internal Verification Page 355 – Human Resource Controls

Petty Cash Procedures Petty Cash is a small fund that is kept in the business to pay expenses that cannot be paid by a check. – Refreshments – Parking – Tips

Three Steps in a Petty Cash Fund Establish the Fund – Entry: March 1 - Petty Cash100 Cash 100

Making Payments From Petty Cash When money is taken, there should be a voucher or receipt placed in the box. – The voucher or receipt shows the amount, date, who the payment was made to, the person approving it and what the payment was for.

Replenishing the Petty Cash Fund Add up all the vouchers – Entry March 15 – Postage Expense 44 Miscellaneous Exp 10 Cash 54 The $54.00 is put in the box to bring the fund back up to $100. **Sometimes the vouchers(receipts) do not exactly match, then you have to use an account called “short and over”.*** DO E8-7 and E8-8 Page 381

Bank Procedures Deposits – Verification of a deposit should always be retained by a business. – Deposits are added to cash balance Checks – Three parts to a check The bank name, the date The payee to whom the check is payable The person signing the check – Checks are subtracted from the cash balance

Bank Reconciliation At the end of the month, the bank sends the account owner a statement either by mail, electronically or both. The statement gives the information on – Checks Paid – Deposits Recorded – NFS Checks – Service Charges – Debit Memos – Credit Memos The bank balance and your cash balance will not match, so you have to reconcile.

Steps in a Bank Reconciliation Deposits in transit – The company recorded them but they have not been recorded by the bank Add to bank balance Outstanding checks – Issued checks recorded by the company but have not been cashed by the bank. Subtract from bank balance

Steps Continued Look for errors – Checks with the wrong amount – Deposits with the wrong amount Bank memoranda – NSF Check (DM) Subtract from check register – Charge for printing checks (DM) Subtract from check register – Collection of a notes receivable (CM) Add to check register Service Charges – Subtract from check register EFT – Electronic Funds Transfer can either be added or subtracted Example on Page 370 and Journal Entries Needed

Assignments Bank Reconciliation Work Sheet Page 384 P8-2A, P8-3A