CHAPTER 7: FRAUD, INTERNAL CONTROL, AND CASH
I. FRAUD AND INTERNAL CONTROL
1. Fraud
- Definition: Fraud is dishonest act by an employee that results in personal
benefit to the employee at a cost to the employer.
- Fraud triangle
+ Opportunity: workplace provide opportunities for employee to commit fraud
lack of control to deter and detect fraud
+ Financial pressure: employees have too much debt or current salary is not
enough for their living.
+ Rationalization: feel like they are underpaid or believe that they deserve to be
paid more.
2. Internal control
* Purposes of internal control:
+ Safeguard assets
+ Enhance accuracy and reliability of accounting methods
+ Increase efficiency of operations
+ Ensure the compliance with laws and regulations
* Five primary components:
+ Control environment: top management responses for making intergrity
environment within the company. Any fraud or unethical activities will not be
forgiven.
Fire employee and must pay compensation in case of fraud.
+ Risk assessment: identify and manage risk, determine how to manage the
risk
+ Control activities: management must design policies and procedures to
manage risk.
Example: Cashier steal cash by not entering sale transaction in the software.
Solutions:
- Alert the customer for receiving the receipt from the cashier, otherwise
customer can report it to the company’s manager and get full refund.
- Camera tracking
- 2 cashiers working near by each other so they can watch other works
+ Information and Communication: The internal control policies must be
communicated both up and down the company and to external parties.
+ Monitoring: internal control policies need to be monitored periodically and
need to be reported to top management and the board of directors
3. Principles of Internal control activities
- Establishment of responsibility:
+ Control is most effective when only one person is responsible for a given task
Case: $10 petty cash short of the cash enter in the cash register.
If only one person work in register responsibility belong to that person,
If two or more cashier in one register cannot determine who is responsible
for the shortage
+ Establishing responsibility ofter requires limiting access only to authorized
personnel, and then identifying those personnel
Case: Identify passcode for person for different task keep track of the one
who issue accounting voucher, the one who enter a sale/purchase, the one who
record journal entry,…
(Accounting voucher = accounting document: VAT bill, cash receipt, cash
payment, bank statement, good receive note, goods dispatch note… chứng từ
kế toán)
- Segregation of Duties:
+ Different individuals should be responsible for related activities
Case: Purchasing activites: different individuals will be responsible for each
tasks in purchasing process.
- Making order and approving order
- Signing contract
- Receive merchandise
- Authorizing payment to the seller
+ Responsibility for record-keeping for an asset should be separate from
physical custody of that asset
Accountant should not be also Treasury(the one who keep cash)
- Documentation Procedures
+ Companies should use prenumbered documents, and all documents should be
accounted for.
Case: an employee record order, receive the cash and throw away the order slip
if it is not numbered.
Prenumbered document helps to prevent recording a transaction more than
once or not being recorded
(sources document = accounting document/voucher)
+ Employees should promptly forward source documents for accounting entries
to the accounting department
- Physical Controls
+ Physical controls relate to the safeguarding of assets and enhance the accuracy
and reliability of the accounting records
- Independent Internal Verification
+ Records periodically verified by an employee who is independent
+ Discrepancies reported to the management
+
- Human resources control
+ Bond employee who handle cash: insurance policy
+ Rotate employees’ duties and required vacations: detect fraud when employee
on vacation or assign to a new position
+ Conduct background checks: education, family, etc
4. Limitations of Internal Controls
- Costs should not exceed the benefits
- Human elements: A good system can become ineffective as a result of
employee fatigue, carelessness, or indifference.
- Size of the business may impose limitations on internal control. Small business
often find it difficult to segregate duties or to provide for independent internal
verification
1. Reconciling: matching between bank and cash book. The company
violates the segragation of duties.
2. Violate the Human resources control
3. Violate the Documentation procedures
[Link] Internal Controls to Cash Controls
1. Cash Receipt Control
- Establishment of Responsibility
+ Only designated personnel are authorized to handle cash receipts Cashier
- Segragation of Duties: Different Individuals
+ Receive cash Cashier
+ Record cash receipts Accountant
+ Hold cash Treasury
- Documentation Procedures: Use
+ Remittance advice(mail receipts): thông báo chuyển tiền
+ Cash register tapes or computer records: Date and time, sales data, payment
method, value$
+ Deposit slips: put cash in bank account
- Physical controls:
+ Store cash in safes and banks vaults
+ Limit access to storage area
+ Use cash registers or point-of-sales terminal(POS: máy quẹt thẻ) : processed
card payment at retail store.
- Independent Internal Verification:
+ Supervisors count cash receipts daily
+ Assistant treasurer compares total receipts to bank deposits daily
- Human Resources Control
+
+
2. Cash disbursement controls
- Establishment of Responsibility
+ Only designated personnel are authorized to sign checks(treasurer) and
approve vendors
- Segregation of Duties
+ Different individuals approve and make payments
+ Check-signers(treasury) do not record disbursement
- Documentation Procedures
+ Use prenumbered checks and account for sequence
+ Each check must have an approved invoice
+ Stamp invoices “paid”
+ Require employee to use corporate credit cards
+ VAT bills come with the checks
- Physical controls
+ Store blank checks in safes, with limited access
+ Print check amounts by machine in indelible ink
- Independent Internal Verification
+ Compare checks to invoices
+ Reconcile bank statement monthly
- Human Resources controls
+ Bond personnel who handle cash
+ Require employees to take vacations
+ Conduct background checks
- Voucher System Control
+ A network of approvals by authorized individuals, acting independently, to
ensure all disbursements by check are proper
+ A voucher is an authorization form prepared for each expenditure in a voucher
system.
4. Petty Cash Fund
- Petty cash fund – Used to pay small amounts
Involves:
4.1. Establishing the Petty Cash Fund
Illustrations:
Cash: at bank
Withdrawall from the bank to create the petty cash fund
4.2. Making Payments from the Petty cash fund
4.3. Replenishing the Petty Cash fund
Establishing amount is 3000
March 15: cash 390, postage expense is 1320, delivery
5. Reconciling the Bank Account
5.1. Reconciliation Procedure
* Cash Balance Per Bank
+ Deposits in transit: your buyer
- Outstanding checks: you write a check and send it to your supplier, you record
in cash book by credit cash. Until the
+/- Bank errors:
* Cash balance Per books
Do it:
a.
Cash balance per bank, July31 HK$7263
Add: Deposits in transit $1300
Deduct: Outstanding check $591
Correct balance: $7972
Cash balance per books, July 31 HK$7284
Deduct: bank service charge $28
Add: Note collection $716
Correct balance: $7972
b. Journal entry
(1)Bank service charge $28
Dr bank service charge expense $28
Cr Cash $28
(2)Note collection
Dr Cash $716
Dr Bank service charge expense $20
Cr Note receivable $700
Cr Interest Revenue $36
IV. REPORTING CASH
1. Reporting of cash
* Cash Equivalents: golds, saving money and bond that is less than 3
months to maturity from the date of financial statement
+ Cash equivalents are short-term, highly liquid investments that are both:
- Readily convertible to known amounts of cash and
- So near their maturity that their market value is relatively insensitive to
changes in interest rates
- Cash and cash equivalent: current assets in balance sheet
* Restricted Cash: only use in emergency case such as accident, natural
disasters,..
- Cash that is not available for general use
- Restricted cash: non-current assets, if company has plan to use restricted cash,
If the company expects to use the restricted cash within the next year,
it reports the amount as a current asset. When this is not the case, it reports the
restricted funds as a non-current asset.
1. False. Not including NSF check
2. True
3. A negative balance in its bank account list as Liabilities
Cash and cash equivalents list as Assets
cannot offset assets and liabilities
4. False. Cash and cash equivalent
Prepare balance sheet, prepare current assets in order:
IFRS: in reverse order of converting item into cash
PPE, inventory, Receivable, Cash
GAAP: in order of converting item into cash
Cash, Receivable, Inventory, PPE,..
* Homework
E7-7
May 1
Dr Petty Cash $100
Cr Cash(at bank) $100
June 1: Total expense = $95.25
Dr Delivery expense $31.25
Dr Postage expense $39
Dr Miscellaneous expense $25
Dr Cash over and short $3.0
Cr Cash $98.25
Current balance of petty cash fund is $100
July 1: Total expense = $96.75
Dr Delivery expense $21
Dr Entertainment expense $51
Dr Miscellaneous $24.75
Cr Cash $96.75
Current balance of petty cash fund is $100
July 10
Dr Petty Cash fund $30
Cr Cash $30
P7-4
a. Bank conciliation
Cash balance per bank, July 31 $7690.8
Add: Deposits in transit $1193.3
Deduct: Outstanding check $1860.1
Correct balance: $7024
Cash balance per books, July 31 $6140
Deduct: bank service charge $25
Add: EFT Note collection $1520
Deduct: Company errors $36
Deduct: NSF Charge $575
Correct balance: $7024
b. Adjusting entries only for cash books
(1) EFT
Dr Cash $1520
Cr Account Receivable $1520
(2) Bank Service charge
Dr Bank Service charge $25
Cr Cash $25
(3) Book error
Before
Dr Account Payable $348
Cr Cash $348
Additional Entry
Dr Account Payable $36
Cr Cash $36
(4) NSF Check
Before, when the company receive the check
Dr Cash $575
Cr Account Receivable $575
Bring the check to bank and being refused
Dr Account Receivable $575
Cr Cash $575
CHAPTER 8: ACCOUNTING FOR RECEIVABLES
I. RECOGNITION OF ACCOUNTS RECEIVABLE
- The term receivables refers to amounts due from individuals and companies
- Receivables are claims that are expected to be collected in cash
-The management of receivables is a very
important activity for any company that sells goods or services on credit.
2. Types of Receivables
- Account Receivables: Amounts customers owe on account that result from the
sale of goods and services
- Notes Receivables: Written promise (formal instrument) for amount to be
received. Normally requires the collection of interest
- Other receivables: Nontrade receivables such as loans to officers, advances to
employees and income tax refundable
Note:
Trade receivable = account receivable + Notes Receivable
Non trade receivable = Other receivables
3. Recognizing Accounts Receivable
- Service organization records a receivable
- Merchandiser records account receivable at point of sale of merchandiser on
account
- Seller may offer a discount to encourage early payment
- Buyer might return goods found to be unacceptable
Sales returns reduce receivables
Zhang Ltd, on July 1,2020
Dr Account Receivable(Li) 1000
Cr Sales Revenue 1000
On July 5
Dr Sales Return and allowance 100
Cr Account Receivable 100
On July 11: The balance due in Account Receivable (Li) = 900
Dr Sales discount 2%*900=18
Dr Cash 882
Cr Account Receivable 900
June 30 Account Receivable 4.5
Interest Revenue 4.5
Case 1: July 2, you pay the balance use due in your credit card
The company
Dr Cash 304.5
Cr Account Receivable 304.5
Case 2: July 31, the company charge interest = 1.5% x 304.5
II. VALUATION AND DISPOSITION OF ACCOUNT RECEIVABLES
1. Valuation of Account Receivables
* Valuing Account Receivable
- Current asset in Balance Sheet
- Valuation (net realizable value)
* Uncollectible Amounts Receivable
- Sales on account raise
2. Accounting for Uncollectible Accounts
* Direct Write-off Method
- No matching of expenses with revenues
- Receivable not stated at net realizable value
- Not acceptable for financial reporting purposes
Example: Assume that Warden write off as uncollectible M.e Doran ‘s 200$
balance on Dec 12 Warden knows exactly that Doran unable to pay
Dr Bad Debt expense 200
Cr Account Receivable 200
+ The company suddenly write off uncollectible at any point of time
Period with large financial shock but other period may not have any bad debt
Not a good matching of expense and revenue
Not acceptable for financial reporting purpos
* Allowance method for Uncollectible receivable
- Company estimate uncollectible accounts receivable
- Debit Bad Debt expense and credit
*In Balance Sheet
Balance sheet
Account Receivable for balance due
Less: Allowance for doubtful account
Net Realizable value
