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Why Care About Internal Control? Meet organization objectivesMeet organization objectives Prevent waste and abusePrevent waste and abuse Fraud a significant.

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Presentation on theme: "Why Care About Internal Control? Meet organization objectivesMeet organization objectives Prevent waste and abusePrevent waste and abuse Fraud a significant."— Presentation transcript:

1 Why Care About Internal Control? Meet organization objectivesMeet organization objectives Prevent waste and abusePrevent waste and abuse Fraud a significant contributing factor in many business failuresFraud a significant contributing factor in many business failures

2 Prevalence of Fraud 73 % of corporate respondents experienced fraud in past year - KPMG, 1998, 199373 % of corporate respondents experienced fraud in past year - KPMG, 1998, 1993 Average business loses 6 % of revenues to fraud - Association of Certified Fraud Examiners, 1997Average business loses 6 % of revenues to fraud - Association of Certified Fraud Examiners, 1997 Fraud falls disproportionately on small businessesFraud falls disproportionately on small businesses

3 What Allowed Frauds to Occur? KPMG 1998, 1993

4 Prevention of Frauds KPMG 1998, 1993

5 Preventing Fraud Establish Code of ConductEstablish Code of Conduct Reference checks on all new hiresReference checks on all new hires Active involvement of ownerActive involvement of owner

6 Control Environment The control environment reflects the attitudes of top managementThe control environment reflects the attitudes of top management –Does management consider controls to be important? –Does management cheat customers, employees, IRS? Code of Conduct is the most common fraud prevention stepCode of Conduct is the most common fraud prevention step

7 Owner Involvement Key Owner ActivitiesKey Owner Activities –Open mail, or delegate to non- accounting person –Sign checks, and control mailing –Receive and review bank statements –Review payroll

8 Conditions for Fraud MotiveMotive –Financial needs or wants (medical bills, lifestyle) OpportunityOpportunity –Weaknesses in controls which allow access to assets Lack of integrityLack of integrity –Thefts are often rationalized, and planned as short-term activities

9 Fraud Perpetrators There is no typical physical descriptionThere is no typical physical description Largest frauds are committed by people:Largest frauds are committed by people: –in executive positions –long tenure with organization –respected and trusted

10 Warning Signs of Fraud Employee characteristicsEmployee characteristics –Work alone or late –Don’t take vacations –Personal characteristics (sweat, defensive, can’t relax) Signs of coverupSigns of coverup –Missing or photocopied documents –Shortages and adjustments Follow up on even one unusual item

11 Specific Areas of Fraud Risk Theft of cash or mail receiptsTheft of cash or mail receipts False paymentsFalse payments Inventory theftInventory theft Payroll fraudPayroll fraud Petty cash and expense accountsPetty cash and expense accounts Fixed assetsFixed assets

12 Sales and Accounts Receivable Key control is prelist of mail receiptsKey control is prelist of mail receipts –Opened by independent person –Listed for control purposes –Restrictively endorsed Deposited regularly and intactDeposited regularly and intact –Compared with prelist Sales reconciled to source documentsSales reconciled to source documents – Cash register tape – Tickets issued, etc.

13 Sales and Accounts Receivable Accounts receivable write-offs and adjustmentsAccounts receivable write-offs and adjustments –Often used to hide theft of cash receipts Failure to record saleFailure to record sale –Account for all source documents

14 Purchases Sign and approve all checksSign and approve all checks –Control mailing to prevent alteration –Review checks returned with bank statement Preventing duplicate paymentsPreventing duplicate payments –Cancel documents –Pay only from original invoice (not statements) supported by receiving report

15 Inventory Adequate perpetual system to record purchases, issuancesAdequate perpetual system to record purchases, issuances Periodic independent counts, especially valuable or high-risk itemsPeriodic independent counts, especially valuable or high-risk items

16 Payroll Fraud Limit checks and review of payrollLimit checks and review of payroll Approval of hoursApproval of hours Distribution of payrollDistribution of payroll Separate payroll bank accountSeparate payroll bank account Hiring independent of payrollHiring independent of payroll

17 Petty Cash and Miscellaneous Funds Miscellaneous accounts are usually individually immaterial, but have high risk of loss –Review frequency of reimbursement –Review of support for activity –Periodic surprise counts

18 Fixed Assets Detailed fixed asset ledger of all major purchasesDetailed fixed asset ledger of all major purchases Assets taggedAssets tagged Periodic physical inventory, especially for portable itemsPeriodic physical inventory, especially for portable items Procedures for disposal and replacementProcedures for disposal and replacement


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