Post on 28-Dec-2015
Copyright © 2016 by McGraw-Hill Education
Chapter 5Fraud, Internal Control, and Cash
PowerPoint Author:Brandy Mackintosh, CA
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Fraud
Fraud is generally defined as an attempt to deceive others for personal gain.
Corruption
Asset Misappropriation
Financial Statement Fraud
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Internal Control ObjectivesInternal control consists of the actions taken by
people at every level of an organization to achieve its objectives.
Operations Reporting Compliance
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Internal Control ComponentsMost 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
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Control LimitationsInternal controls can never completely prevent and detect errors and fraud for two reasons:
Benefits must exceed the
costs
Human error
or
fraud
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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.
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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:
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Cash Received in Person
2 Record
Cash Cash Shortage
Sales Revenue 6,100
6,0973
1 Analyze
LiabilitiesAssets = Stockholders’ Equity+
Cash +$6,097
SalesRevenue (+R) +$6,100Cash Shortage (+E) -$3
Cashiers rung up sales totaling $6,100 but had only $6,097 to deposit.
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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.
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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.
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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.
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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.
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Bank Reconciliation
To determine the appropriate cash balance, these balances need to be
reconciled.
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Bank Reconciliation
Bank Reconciliation Goals1.Identify the deposits in transit. 2.Identify the outstanding checks. 3.Record other transactions on the bank statement and
correct your errors.
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Bank Reconciliation
After the reconciling entries are posted, the Cash balance matches the bank
reconciliation ($11,478.40).
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Petty Cash Systems
1. Put money into the fund
2. Pay money out of the fund
3. Replenish the fund
1 Analyze
LiabilitiesAssets = Stockholders’ Equity+
Cash -$100 Petty Cash +$100
2 Record
Petty Cash Cash 100
100
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Petty Cash Systems
1. Put money into the fund
2. Pay money out of the fund
3. Replenish the fund
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Petty Cash Systems
1. Put money into the fund
2. Pay money out of the fund
3. Replenish the fund
1 Analyze
LiabilitiesAssets = Stockholders’ Equity+
Cash - $67 Supplies + $40
Travel Expense (+E) -$21Office Expense (+E) -$6
2 Record
SuppliesTravel ExpenseOffice Expense Cash 67
4021
6
Copyright © 2016 by McGraw-Hill Education
Chapter 5Solved Exercises
M5-3, M5-8, M5-14, M5-16, E5-5, E5-9
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M5-3 Identifying Internal Control Principles Applied by a Merchandiser Identify the internal control principle represented by each point in the following diagram.
Establish Responsibility
Segregate Duties
Restrict Access
Document Procedures
Document Procedures
Independent Verify
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M5-8 Organizing Items on the Bank ReconciliationIndicate whether the following items would be added (+) or subtracted (-) from the company’s books or the bank statement side of a bank reconciliation.
--
++
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M5-14 Reporting Cash and Cash EquivalentsIndicate (Yes or No) whether each of the following is properly included in Cash and Cash Equivalents.
Yes
No
No
Yes
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M5-16 (Supplement 5A) Accounting for Petty Cash TransactionsOn September 30, Hector’s petty cash fund of $100 is replenished. At the time, the cash box contained $18 cash and receipts for taxi fares ($40), delivery charges ($12), and office supplies ($30). Prepare the journal entry to record the replenishment of the fund.
Travel Expense .................................................................................. 40 Delivery Expense ............................................................................... 12 Supplies Expense .............................................................................. 30 Cash ............................................................................. 82
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E5-5 Preparing a Bank Reconciliation and Journal Entries, and Reporting CashHills Company’s June 30 bank statement and the June ledger account for cash are summarized here:
Required:1. Prepare a bank reconciliation. A comparison of the checks written with the checks that have cleared the bank shows outstanding checks of $700. Some of the checks that cleared in June were written prior to June. No deposits in transit were noted in May, but a deposit is in transit at the end of June.
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HILLS COMPANYBank Reconciliation
June 30
Bank Statement
Ending balance per bank statement………………..
Additions:
Deposit in transit…………….
Deductions:
Outstanding checks………...
Up-to-date cash balance…...
*$19,000 - $18,000 = $1,000.
$ 6,070
*1,0007,070
700
$6,370
Company’s Books
Ending balance per Cash account ………………..
Additions:
None
Deductions:
Bank service charge...……...
Up-to-date cash balance…...
$ 6,400
6,400
30
$6,370
E5-5 Preparing a Bank Reconciliation and Journal Entries, and Reporting Cash
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E5-5 Preparing a Bank Reconciliation and Journal Entries, and Reporting Cash2. Give any journal entries that should be made as a result of the
bank reconciliation.
3. What is the balance in the Cash account after the reconciliation entries?
4. In addition to the balance in its bank account, Hills Company also has $300 of petty cash on hand. This amount is recorded in a separate T-account called Petty Cash on Hand. What is the total amount of cash that should be reported on the balance sheet at June 30?
$6,370 ($6,400 - $30)
Office Expenses Cash To record bank service charges.
3030
Balance sheet (June 30): Current assets: Cash ($6,370 + $300) $6,670
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E5-9 (Supplement 5A) Recording Petty Cash TransactionsSunshine Health established a $100 petty cash fund on January 1. From January 2 through 10, payments were made from the fund, as listed below. On January 12, the fund had only $10 remaining;a check was written to replenish the fund.
a. January 2- Paid cash for deliveries to customers - $23.b. January 7- Paid cash for taxi fare incurred by office manager- $50.c. January 10- Paid cash for pens and other office supplies - $17.
Required:1. Prepare the journal entry, if any, required on January 1.
Petty Cash Cash
100100
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E5-9 (Supplement 5A) Recording Petty Cash Transactions
Required:2. Prepare the journal entries, if any, required on January 2 through 10.
3. Prepare the journal entries, if any, required on January 12.
No journal entries are recorded when amounts are paid out of the petty cash fund. These transactions are recorded only when the fund is replenished.
Delivery ExpenseTravel ExpenseSupplies Cash
90
235017