1. Copyright © 2016 by McGraw-Hill Education Chapter 5 Fraud, Internal Control, and Cash PowerPoint Author: Brandy Mackintosh, CA

2. 5-2 Learning Objective 5-1 Define fraud and internal control.

3. 5-3 Fraud Fraud is generally defined as an attempt to deceive others for personal gain. Corruption Asset Misappropriation Financial Statement Fraud

4. 5-4 Fraud

5. 5-5 The Sarbanes-Oxley Act (SOX)

6. 5-6 Internal Control Objectives Internal control consists of the actions taken by people at every level of an organization to achieve its objectives. OperationsReportingCompliance

7. 5-7 Internal Control Components Most organizations use the following control components as a framework when analyzing their internal control systems. Control Environment Risk Assessment Control Activities Monitoring Activities Information and Communication s

8. 5-8 Relationship of Control Objectives and Components

9. 5-9 Learning Objective 5-2 Explain common principles and limitations of internal control.

10. 5-10 Principles of Control Activities

11. 5-11 Control Limitations Internal controls can never completely prevent and detect errors and fraud for two reasons: Benefits must exceed the costs Human error or fraud

12. 5-12 Learning Objective 5-3 Apply internal control principles to cash receipts and payments.

13. 5-13 Internal Control for Cash Internal controls for cash are important because the volume of cash transactions is enormous and because cash is valuable and portable and therefore poses a high risk of theft.

14. 5-14 Controls for Cash Receipts Receive cash in person at time of sale Receive cash through electronic transfer The primary internal control goal for cash receipts is to ensure that the business receives the appropriate amount of cash and safely deposits it in the bank. Business can receive cash in two different ways:

15. 5-15 Cash Received in Person

16. 5-16 Cash Received in Person 2 Record Cash Cash Shortage Sales Revenue6,100 6,097 3 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash +$6,097 Sales Revenue (+R) +$6,100 Cash Shortage (+E) -$3 Cashiers rung up sales totaling $6,100 but had only $6,097 to deposit.

17. 5-17 Cash Received from a Remote Source

18. 5-18 Cash Received from a Remote Source

19. 5-19 Controls for Cash Payments Most cash payments involve writing a check or completing an electronic funds transfer (EFT). In rare cases where a company pays for purchases with dollar bills and coins, it uses a petty cash system. The primary goal of internal controls for all cash payments is to ensure that the business pays only for properly authorized transactions.

20. 5-20 Cash Paid by Check for Purchases on Account

21. 5-21 Cash Paid by Check for Purchases on Account

22. 5-22 Cash Paid by Check for Purchases on Account

23. 5-23 Cash Paid by Check for Purchases on Account

24. 5-24 Cash Paid by Check for Purchases on Account

25. 5-25 Cash Paid by Check for Purchases on Account

26. 5-26 Cash Paid to Employees via Electronic Funds Transfer Most companies pay cash to their employees through EFTs, which are known by employees as direct deposits. To reduce the risk of the bank accidentally overpaying or underpaying an employee, many companies use an imprest system.

27. 5-27 Cash Paid to Reimburse Employees (Petty Cash) A petty cash system is used to reimburse employees for small expenditures they have made on behalf of the organization.

28. 5-28 Controls from Bank Procedures Banks provide important services that help businesses to control cash in several ways: Restricting Access Documenting Procedures Independently Verifying A bank reconciliation is an internal report prepared to verify the accuracy of both the bank statement and the cash accounts of a business or individual.

29. 5-29 Learning Objective 5-4 Perform the key control of reconciling cash to bank statements.

30. 5-30 Bank Statement

31. 5-31 Bank Reconciliation

32. 5-32 Bank Reconciliation To determine the appropriate cash balance, these balances need to be reconciled.

33. 5-33 Bank Reconciliation Bank Reconciliation Goals 1.Identify the deposits in transit. 2.Identify the outstanding checks. 3.Record other transactions on the bank statement and correct your errors.

34. 5-34 Bank Reconciliation

35. 5-35 Bank Reconciliation After the reconciling entries are posted, the Cash balance matches the bank reconciliation ($11,478.40).

36. 5-36 Learning Objective 5-5 Explain the reporting of cash.

37. 5-37 Reporting Cash (in millions)

38. Copyright © 2016 by McGraw-Hill Education Supplement 5A Petty Cash Systems

39. 5-39 Learning Objective 5-S1 Describe the operations of petty cash systems.

40. 5-40 Petty Cash Systems 1. Put money into the fund 2. Pay money out of the fund 3. Replenish the fund 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash -$100 Petty Cash +$100 2 Record Petty Cash Cash100

41. 5-41 Petty Cash Systems 1. Put money into the fund 2. Pay money out of the fund 3. Replenish the fund

42. 5-42 Petty Cash Systems 1. Put money into the fund 2. Pay money out of the fund 3. Replenish the fund 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash - $67 Supplies + $40 Travel Expense (+E) -$21 Office Expense (+E) -$6 2 Record Supplies Travel Expense Office Expense Cash67 40 21 6

43. 5-43 End of Chapter 5