Cash, Fraud, and Internal Control Chapter 6 Wild

Cash, Fraud, and Internal Control Chapter 6 Wild

Cash, Fraud, and Internal Control Chapter 6 Wild and Shaw Financial and Managerial Accounting 8th Edition 2019 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. Chapter 6 Learning Objectives CONCEPTUAL C1 Define internal control and identify its purpose and principles. C2 Define cash and cash equivalents and explain how to report them. ANALYTICAL A1 Compute the days sales uncollected ratio and use it to assess liquidity.

PROCEDURAL P1 Apply internal control to cash receipts and payments. P2 Explain and record petty cash fund transactions. P3 Prepare a bank reconciliation. P4 Appendix 6A Describe use of documentation and verification to control cash payments. McGraw-Hill Education. 2 Learning Objective C1 Define internal control and identify

its purpose and principles. McGraw-Hill Education. 3 Internal Control System Policies and procedures used to: Protect assets. Ensure reliable accounting. Uphold company policies. Promote efficient operations. Learning Objective C1: Define internal control and identify its purpose and principles.

McGraw-Hill Education. 4 Sarbanes-Oxley Act (SOX) The Sarbanes-Oxley Act requires managers and auditors of public companies to document and certify the system of internal controls. Section 404 of SOX requires that managers document and assess the effectiveness of all internal control processes that can impact financial reporting. Learning Objective C1: Define internal control and identify its purpose and principles.

McGraw-Hill Education. 5 Committee of Sponsoring Organizations (COSO) Committee of Sponsoring Organizations provides five ingredients of internal control which add quality to accounting information: 1. 2. 3. 4. 5.

Control environment. Risk assessment. Control activities. Information & communication. Monitoring. Learning Objective C1: Define internal control and identify its purpose and principles. McGraw-Hill Education. 6 Principles of Internal Control

Internal control principles common to all companies: 1. Establish responsibilities. 2. Maintain adequate records. 3. Insure assets and bond key employees. 4. Separate recordkeeping from custody of assets. 5. Divide responsibility for related transactions. 6. Apply technological controls. 7. Perform regular and independent reviews. Learning Objective C1: Define internal control and identify its purpose and principles. McGraw-Hill Education. 7

Internal Control: Establish Responsibilities Establish responsibilities: 1. Tasks should be clearly established. 2. Tasks should be assigned to one person. 3. Can then determine who is at fault. Learning Objective C1: Define internal control and identify its purpose and principles. McGraw-Hill Education. 8

Internal Control: Maintain Adequate Records Maintain Adequate Records: 1. Protects assets. 2. Helps managers monitor company activities. 3. Includes: 1. 2. 3. 4. 5. Detailed records. Use of chart of accounts.

Preprinted forms. Prenumbered sales slips. Computerized point-of-sale systems. Learning Objective C1: Define internal control and identify its purpose and principles. McGraw-Hill Education. 9 Internal Control: Insure Assets and Bond Key Employees Insure Assets and Bond Key Employees: 1. Assets should be insured against losses.

2. Employees handling a lot of cash and other assets should be bonded. 3. Bonded means the company has purchased an insurance policy against theft by that employee. Learning Objective C1: Define internal control and identify its purpose and principles. McGraw-Hill Education. 10 Internal Control: Separate Recordkeeping from Custody of Assets Separate Recordkeeping from Custody of

Assets: 1. Person who controls or has access to assets must not have access to that assets accounting records. 2. Reduces risk of theft or waste of an asset. 3. Employees would need to collude, agree in secret to commit fraud under this control. Learning Objective C1: Define internal control and identify its purpose and principles. McGraw-Hill Education. 11 Internal Control: Divide Responsibility for

Related Transactions Divide Responsibility for Related Transactions: 1. Responsibility for a transactions should be divided between two or more individuals. 2. Ensures work of one person acts as a check on the other to prevent fraud or errors. 3. Called separation of duties. Learning Objective C1: Define internal control and identify its purpose and principles. McGraw-Hill Education. 12

Internal Control: Apply Technological Controls Apply Technological Controls: 1. Cash registers make an electronic file/record of each sale. 2. Time clock records exact time employee works. 3. Personal scanners limit access to authorized individuals. Learning Objective C1: Define internal control and identify its purpose and principles. McGraw-Hill Education. 13

Internal Control: Perform Regular and Independent Reviews Apply Technological Controls: 1. Helps ensure that procedures are followed. 2. Preferably done by auditors not directly involved in the activities. 3. Auditors evaluate the efficiency and effectiveness of internal controls. Learning Objective C1: Define internal control and identify its purpose and principles. McGraw-Hill Education.

14 Technology, Fraud, and Internal Control Learning Objective C1: Define internal control and identify its purpose and principles. McGraw-Hill Education. 15 Limitations of Internal Control Human Error

Human Fraud Carelessness Misjudgment Confusion Intentionally defeating internal controls for personal gain Human fraud triple-threat: Opportunity, Financial Pressure, Rationalization Cost-benefit principle: Costs of internal controls must not exceed their benefits. Learning Objective C1: Define internal control and identify its purpose and principles.

McGraw-Hill Education. 16 Learning Objective C2 Define cash and cash equivalents and explain how to report them. McGraw-Hill Education. 17

Control of Cash An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines: Access the text alternative for slide images. Learning Objective C2: Define cash and cash equivalents and explain how to report them. McGraw-Hill Education. 18 Cash, Cash Equivalents, and

Liquidity Cash and similar assets are called liquid assets because they can be readily used to pay current liabilities. Cash Currency, coins, and deposits in bank accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders. Cash Equivalents Short-term, highly liquid investments that are: 1. Readily convertible to a known cash amount. 2. Close to maturity date and not sensitive to changes. Learning Objective C2: Define cash and cash equivalents and explain how to report them. McGraw-Hill Education.

19 Cash Management The goals of cash management are twofold: 1. Plan cash receipts to meet cash payments when due. 2. Keep a minimum level of cash necessary to operate. Effective cash management involves applying the following cash management strategies:

Encourage collection of receivables. Delay payment of liabilities. Keep only necessary assets. Plan expenditures. Invest excess cash. Learning Objective C2: Define cash and cash equivalents and explain how to report them. McGraw-Hill Education. 20

Learning Objective P1 Apply internal control to cash receipts and payments. McGraw-Hill Education. 21 Over-the-Counter Cash Receipts This graphic illustrates that none of the people involved can make a mistake or divert cash without the difference being revealed.

Access the text alternative for slide images. Learning Objective P1: Apply internal control to cash receipts and payments. McGraw-Hill Education. 22 Cash Over and Short: Overage Sometimes errors in making change are discovered from differences between the cash in the cash register and the record of the amount of cash receipts. If a cash registers record shows $550 but the count of cash in the register is $555, we would prepare the following journal

entry: Access the text alternative for slide images. Learning Objective P1: Apply internal control to cash receipts and payments. McGraw-Hill Education. 23 Cash Over and Short: Shortage Sometimes errors in making change are discovered from differences between the cash in the cash register and the record of the amount of cash receipts.

On the other hand, if a cash registers record shows $625 but the count of cash in the register is $621, the entry to record cash sales and its shortage is: Access the text alternative for slide images. Learning Objective P1: Apply internal control to cash receipts and payments. McGraw-Hill Education. 24 Cash Receipts by Mail Two people are

assigned the task of opening the mail. The cashier deposits the cash in a bank. Learning Objective P1: Apply internal control to cash receipts and payments. The recordkeeper records the amounts received in the accounting records. McGraw-Hill Education.

25 Control of Cash Payments Control of cash payments important as most large thefts are from payment of fictitious invoices. Keys to Controlling Cash Payments: Require all payments to be made by check. Limit access to checks except for those who have the authority to sign checks. Cash Budget: Includes projected cash receipts and cash disbursements. Learning Objective P1: Apply internal control to cash receipts and payments.

McGraw-Hill Education. 26 Voucher System of Control 1 A voucher system establishes procedures for: 1. Verifying, approving, and recording liabilities for eventual cash payments. 2. Issuing checks for payment of verified, approved, and recorded liabilities.

Learning Objective P1: Apply internal control to cash receipts and payments. McGraw-Hill Education. 27 Voucher System of Control 2 Exhibit 6.1 Access the text alternative for slide images.

Learning Objective P1: Apply internal control to cash receipts and payments. McGraw-Hill Education. 28 Learning Objective P2 Explain and record petty cash fund transactions. McGraw-Hill Education.

29 Petty Cash System of Control Small payments for items such as: Shipping fees. Minor repairs. Low-cost supplies. Learning Objective P2: Explain and record petty cash fund transactions. McGraw-Hill Education. 30

Establishing a Petty Cash Fund To establish a petty cash fund: Petty Cash is debited to increase Cash is credited to decrease Access the text alternative for slide images. Learning Objective P2: Explain and record petty cash fund transactions. McGraw-Hill Education. 31 Operating a Petty Cash Fund Summary of petty cash receipts:

Exhibit 6.3 Access the text alternative for slide images. Learning Objective P2: Explain and record petty cash fund transactions. McGraw-Hill Education. 32 Reimbursement of Petty Cash Fund Cash payments report is used in making the journal entry to reimburse the fund. Debit each

of the expenses and credit cash. Access the text alternative for slide images. Learning Objective P2: Explain and record petty cash fund transactions. McGraw-Hill Education. 33 Increasing or Decreasing a Petty Cash Fund To increase, debit Petty Cash and credit Cash.

To decrease, debit Cash and credit Petty Cash. Access the text alternative for slide images. Learning Objective P2: Explain and record petty cash fund transactions. McGraw-Hill Education. 34 Cash Over and Short If petty cashier fails to obtain a receipt for payment or overpays an amount, cash over or short will result. Petty cash payments report plus cash left in account will not

total to the fund balance. Shortage: Difference is debited to Cash Over and Short. Overage: Difference is credited to Cash Over and Short. Access the text alternative for slide images. Learning Objective P2: Explain and record petty cash fund transactions. McGraw-Hill Education. 35 Basic Bank Services

Learning Objective P2: Explain and record petty cash fund transactions. McGraw-Hill Education. 36 Deposit Ticket 1. Used to deposit money in the bank. 2. Lists cash and checks along with the amounts. 3. Serves as proof of deposit. Exhibit 6.4 Access the text alternative for slide images.

Learning Objective P2: Explain and record petty cash fund transactions. McGraw-Hill Education. 37 Check 1. Used to withdraw money from the bank. 2. Includes maker, signor of check; payee; and payer (bank). Exhibit 6.5 Access the text alternative for slide images.

Learning Objective P2: Explain and record petty cash fund transactions. McGraw-Hill Education. 38 Bank Statement Exhibit 6.6 Usually once a month, the bank sends each depositor a bank statement showing

the activity in the account. Access the text alternative for slide images. Learning Objective P2: Explain and record petty cash fund transactions. McGraw-Hill Education. 39 Learning Objective P3 Prepare a bank reconciliation.

McGraw-Hill Education. 40 Bank Reconciliation A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on companys books. Access the text alternative for slide images. Learning Objective P3: Prepare a bank reconciliation.

McGraw-Hill Education. 41 Purpose of Bank Reconciliation The balance of a checking account reported on the bank statement rarely equals the balance in the depositors accounting records. Adjusting entries are recorded for the reconciling items on the book side of the reconciliation. Access the text alternative for slide images. Learning Objective P3: Prepare a bank reconciliation.

McGraw-Hill Education. 42 Bank Reconciliation Demonstration: Steps 1-4 Exhibit 6.7 Access the text alternative for slide images. Learning Objective P3: Prepare a bank reconciliation. McGraw-Hill Education.

43 Bank Reconciliation Demonstration: Steps 5-8 Exhibit 6.7 Access the text alternative for slide images. Learning Objective P3: Prepare a bank reconciliation. McGraw-Hill Education. 44

Adjusting Entries from a Bank Reconciliation Only items reconciling the book balance require adjustment. Access the text alternative for slide images. Learning Objective P3: Prepare a bank reconciliation. McGraw-Hill Education. 45 Learning Objective A1 Compute the days sales

uncollected ratio and use it to assess liquidity. McGraw-Hill Education. 46 Days Sales Uncollected Exhibit 6.9 Indicates how much time is likely to pass before we receive cash receipts from credit sales. Accounts receivable Days' sales uncollected

365 Net sales Access the text alternative for slide images. Learning Objective A1: Compute the days sales uncollected ratio and use it to assess liquidity. McGraw-Hill Education. 47 Learning Objective P4 Appendix 6A Describe use of documentation

and verification to control cash payments. McGraw-Hill Education. 48 Documentation and Verification Purchase Requisition Purchase Order Invoice Receiving Report Learning Objective P4: Describe use of documentation and verification to control cash payments. McGraw-Hill Education.

49 Invoice Approval Accounting department will record purchase and approve payment after all documents are in order. Information across all documents are verified. Invoice approval also called check authorization. Checklist of steps necessary for approving invoice and payment. Learning Objective P4: Describe use of documentation and verification to control cash payments.

McGraw-Hill Education. 50 Voucher Voucher is complete after invoice has been checked and approved. Used to authorize recording obligation. Certain information is required on the inside of a voucher. Certain information is also required on the outside of a voucher. Learning Objective P4: Describe use of documentation and verification to control cash payments.

McGraw-Hill Education. 51 End of Chapter 6 McGraw-Hill Education. 52

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