1. Chapter – 8: Fraud, Internal Control & Cash OverviewControl FeaturesBank ReconciliationAdjusting Entries

2. Fraud The Sarbanes- Oxley Act Internal control Principles of internal control Limitations Cash equivalents Restricted cash Compensating balances Making deposits Writing checks Bank statements Reconciling the bank account Electronic funds transfer (EFT) system Cash receipts controls Cash disbursements controls Fraud and Internal Control Cash Controls Control Features: Use of a Bank Reporting Cash Fraud, Internal Control, and Cash

3. Control Features: Use of Banks Contributes to good internal control over cash ◦ Minimizes the amount of currency on hand ◦ Creates a double record of bank transactions ◦ Bank reconciliation Some payments are so small that companies pay them from a different cash account called petty cash

4. Control Features: Use of Banks Deposit can be done through: ◦ Cash: In cash counter of bank ◦ Check: In clearing section of bank Requires a deposit slip

5. Control Features: Use of Banks Medium to large amount of payments can be done through writing checks.

6. Control Features: Use of Banks A bank statement shows the account holder’s bank transactions and balances for a certain period of time. ◦ Transactions that increase bank balance are recorded in the credit side ◦ Transactions that decrease bank balance are recorded in the debit side Bank service charges are recorded in the statement and also a debit memorandum is attached with it Notes Receivables collection and Interest earned are recorded in the statement and a credit memorandum is attached with it

7. Bank Reconciliation

8. Bank Reconcilliation Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances. Reconciling Items: 1. Deposits in transit. 2. Outstanding checks. 3. Errors. 4. Bank memoranda.

9. Bank Reconciliation Reconciliation Procedures + Deposit in Transit - Outstanding Checks +- Bank Errors +Notes collected by bank -NSF (bounced) checks -Check printing or other service charges +-Company Errors CORRECT BALANCE

10. Bank Reconciliation Example: Example: The bank statement for Laird Company shows a balance per bank of $15,907.45 on April 30, 2010. On this date the balance of cash per books is $11,589.45. Using the four reconciliation steps, Laird determines the following reconciling items.

11. Bank Reconciliation Example: Example: a) Prepare a bank reconciliation at April 30. Cash balance per bank statement$15,907.45 Add: Deposit in transit2,201.40 Less:Outstanding checks(5,904.00) Adjusted cash balance per bank$12,204.85 Cash balance per books$11,589.45 Collection of notes + interest - fee1,035.00 Add:Error in recording check no. 44336.00 Less:NSF check(425.60) Bank service charge(30.00) Adjusted cash balance per books$12,204.85

12. Adjusting Entries The company records each reconciling item used to determine the adjusted cash balance per books. Collection of Note Receivable: Assuming interest of $50 has not been accrued and collection fee is charged to Miscellaneous Expense, the entry is: Cash 1,035.00Apr. 30 Miscellaneous expense15.00 Notes receivable1,000.00 Interest revenue50.00

13. Adjusting Entries Book Error: The cash disbursements journal shows that check no. 443 was a payment on account to Andrea Company, a supplier. The correcting entry is: Cash 36.00Apr. 30 Accounts payable36.00

14. Adjusting Entries NSF Check: As indicated earlier, an NSF check becomes an account receivable to the depositor. The entry is: Accounts receivable425.60Apr. 30 Cash425.60 Bank Service Charges: Depositors debit check printing charges (DM) and other bank service charges (SC) to Miscellaneous Expense. The entry is: Miscellaneous30.00Apr. 30 Cash30.00