Presentation on theme: "Fraud and Internal Control"— Presentation transcript:
1 Fraud and Internal Control Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.Illustration 7-1Why does fraud occur?SO 1 Define fraud and internal control.
2 Fraud and Internal Control The Sarbanes-Oxley ActCompanies mustdevelop principles of control over financial reporting.continually verify that controls are working.Independent auditors must attest to the adequacyof internal control.SOX created the Public Company Accounting Oversight Board (PCAOB).SO 1 Define fraud and internal control.
3 Fraud and Internal Control Methods and measures adopted to:Safeguard assets.Enhance accuracy and reliability of accounting records.Increase efficiency of operations, andEnsure compliance with laws and regulations.Under the Sarbanes-Oxley Act, all publicly traded U.S. corporations are required to maintain an adequate system of internal control.SO 1 Define fraud and internal control.
4 Fraud and Internal Control Internal control systems have five primary componentsA control environmentRisk assessmentControl activitiesInformation and communicationMonitoringSO 1 Define fraud and internal control.
5 Fraud and Internal Control Principles of Internal Control ActivitiesMeasures vary withmanagement’s assessment of the risks faced.size and nature of the company.Six principles of controls activities:Establishment of responsibilitySegregation of dutiesDocumentation proceduresPhysical controlsIndependent internal verificationHuman resource controlsSO 2 Identify the principles of internal control.
6 Fraud and Internal Control Principles of Internal Control ActivitiesESTABLISHMENT OF RESPONSIBILITYControl is most effective when only one person is responsible for a given task.SEGREGATON OF DUTIESRelated duties, including physical custody and record keeping, should be assigned to different individuals.DOCUMENTATION PROCEDURESCompanies should use prenumbered documents for all documents should be accounted for.SO 2 Identify the principles of internal control.
7 Fraud and Internal Control Principles of Internal Control ActivitiesPHYSICAL CONTROLSIllustration 7-2SO 2 Identify the principles of internal control.
8 Fraud and Internal Control Principles of Internal Control ActivitiesINDEPENDENT INTERNAL VERIFICATIONVerify records periodically or on a surprise basis.Records verified by an employee who is independent.Discrepancies reported to management.Illustration 7-3SO 2 Identify the principles of internal control.
9 Fraud and Internal Control Principles of Internal Control ActivitiesHUMAN RESOURCE CONTROLSBond employees.Rotate employees’ duties and require vacations.Conduct background checks.SO 2 Identify the principles of internal control.
10 Fraud and Internal Control Limitations of Internal ControlCosts should not exceed benefit.Human element.Size of the business.SO 2 Identify the principles of internal control.
11 Cash Receipts Controls Over-the-Counter ReceiptsIllustration 7-4Establishment of ResponsibilityOnly designated personnel are authorized to handle cash receipts (cashiers)Documentation ProceduresUse remittance advice (mail receipts), cash register tapes, and deposit slipsIndependent Internal VerificationSupervisors count cash receipts daily; treasurer compares total receipts to bank deposits dailySegregation of DutiesDifferent individuals receive cash, record cash receipts, and hold the cashPhysical ControlsStore cash in safes and bank vaults; limit access to storage areas; use cash registersHuman Resource ControlsBond personnel who handle cash; require employees to take vacations; deposit all cash in bank dailySO 3 Explain the applications of internal control principles to cash receipts.
12 Cash Receipts Controls Cash consists of coins, currency, checks, money orders, and money on hand or on deposit in a bank.Cash receipts come from:cash salescollections on account from customersreceipt of interest, rent, and dividendsinvestments by ownersbank loansproceeds from the sale of noncurrent assetsSO 3 Explain the applications of internal control principles to cash receipts.
13 Over-the-Counter Receipts Illustration 7-5SO 3 Explain the applications of internal control principles to cash receipts.
14 Cash Receipts Controls Mail ReceiptsMail receipts should be opened by two people, a list prepared, and each check endorsed.Copy of the list, along with the checks and remittance advices, sent to cashier’s department.Cashier adds the checks to the over-the-counter receipts and prepares a daily cash summary and makes the daily bank deposit.Copy of list sent to treasurer’s office for comparison with total shown on daily cash summary.SO 3 Explain the applications of internal control principles to cash receipts.
15 Cash Disbursement Controls Generally, internal control over cash disbursements is more effective when companies pay by check, rather than by cash.Applications:Voucher systemPetty cash fundSO 4 Explain the applications of internal control principles to cash disbursements.
16 Cash Disbursement Controls Illustration 7-6Documentation ProceduresUse prenumbered checks; checks must have an approved invoice; require employees to use corporate credit cards for reimbursableexpensesEstablishment of ResponsibilityOnly designated personnel are authorized to sign checks (treasurer) and approve vendorsIndependent Internal VerificationCompare checks to invoices; reconcile bank statement monthlyHuman Resource ControlsBond personnelwho handle cash;require employeesto take vacations;conduct backgroundchecksSegregation of DutiesDifferent individuals approve and make payments; check signers do not record disbursementsPhysical ControlsStore blank checks in safes, with limited access; print check amounts by machine in indelible ink
17 Cash Disbursement Controls Voucher System ControlsVoucher SystemNetwork of approvals, by authorized individuals, to ensure all disbursements by check are proper.A voucher is an authorization form prepared for each expenditure.SO 4 Explain the applications of internal control principles to cash disbursements.
18 Cash Disbursement Controls Petty Cash Fund ControlsPetty Cash Fund - Used to pay small amounts.Involves:establishing the fund,making payments from the fund, andreplenishing the fund.SO 5 Describe the operation of a petty cash fund.
19 Cash Disbursement Controls Illustration: If Laird Company decides to establish a $100 fund on March 1, the journal entry is:Mar. 1Petty cash 100Cash 100SO 5 Describe the operation of a petty cash fund.
20 Cash Disbursement Controls Illustration: Assume that on March 15 Laird’s petty cash custodian requests a check for $87. The fund contains $13 cash and petty cash receipts for postage $44, freight-out $38, and miscellaneous expenses $5. The general journal entry to record the check is:Mar. 15Postage expense 44Freight-out 38Miscellaneous expense 5Cash 87SO 5 Describe the operation of a petty cash fund.
21 Cash Disbursement Controls Illustration: Occasionally, the company may need to recognize a cash shortage or overage. Assume that Laird’s petty cash custodian has only $12 in cash in the fund plus the receipts as listed. The request for reimbursement would, therefore, be for $88, and Laird would make the following entry:Mar. 15Postage expense 44Freight-out 38Miscellaneous expense 5Cash over and short 1Cash 88SO 5 Describe the operation of a petty cash fund.