Slide 1Slide 2CHAPTER OUTLINESlide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Slide 43Slide 44Slide 45Slide 46Slide 47Slide 48Slide 49Slide 50Slide 51Slide 52Slide 53Slide 547-17-2Fraud, Internal Control, and CashKimmel ● Weygandt ● KiesoFinancial Accounting, Eighth Edition77-3Apply internal control principles to cash.CHAPTER OUTLINEDefine fraud and the principles of internal control.12LEARNING OBJECTIVESIdentify the control features of a bank account.3Explain the reporting of cash and the basic principles of cash management.47-4Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.Three factors that contribute to fraudulent activity.ILLUSTRATION 7-1Fraud triangleFRAUDLEARNING OBJECTIVEDefine fraud and the principles of internal control. 1LO 17-5Applies to publicly traded U.S. corporations. Required to maintain a system of internal control.Corporate executives and boards of directors must ensure that these controls are reliable and effective. Independent outside auditors must attest to the adequacy of the internal control system.SOX created the Public Company Accounting Oversight Board (PCAOB).THE SARBANES-OXLEY ACTLO 17-6Methods and measures adopted to:1. Safeguard assets. 2. Enhance accuracy and reliability of accounting records. 3. Increase efficiency of operations.4. Ensure compliance with laws and regulations.INTERNAL CONTROLLO 17-7Five Primary Components:1. Control environment. 2. Risk assessment. 3. Control activities.4. Information and communication.5. Monitoring.INTERNAL CONTROLLO 17-8Establishment of ResponsibilityControl is most effective when only one person is responsible for a given task.Establishing responsibility often requires limiting access only to authorized personnel, and then identifying those personnel.PRINCIPLES OF INTERNAL CONTROL ACTIVITIESLO 17-9Segregation of DutiesDifferent individuals should be responsible for related activities.The responsibility for record-keeping for an asset should be separate from the physical custody of that asset.PRINCIPLES OF INTERNAL CONTROL ACTIVITIESLO 17-10Documentation ProceduresCompanies should use prenumbered documents, and all documents should be accounted for.Employees should promptly forward source documents for accounting entries to the accounting department.PRINCIPLES OF INTERNAL CONTROL ACTIVITIESLO 17-11Physical ControlsPRINCIPLES OF INTERNAL CONTROL ACTIVITIESILLUSTRATION 7-2Physical controlsLO 17-12Records periodically verified by an employee who is independent.Discrepancies reported to management.Independent Internal VerificationPRINCIPLES OF INTERNAL CONTROL ACTIVITIESILLUSTRATION 7-3Comparison of segregation of duties principle withindependent internal verification principleLO 17-13Human Resource ControlsBond employees who handle cash.Rotate employees’ duties and require vacations.Conduct background checks.PRINCIPLES OF INTERNAL CONTROL ACTIVITIESLO 17-14The Missing ControlEstablishment of responsibility. The healthcare company did not adequately restrict the responsibility for authorizing and approving claims transactions. The training supervisor should not have been authorized to create claims in the company’s “live” system.Total take: $11 millionANATOMY OF A FRAUDMaureen Frugali was a training supervisor for claims processing at Colossal Healthcare. As a standard part of the claims processing training program, Maureen created fictitious claims for use by trainees. These fictitious claims were then sent to the accounts payable department. After the training claims had been processed, she was to notify Accounts Payable of all fictitious claims, so that they would not be paid. However, she did not inform Accounts Payable about every fictitious claim. She created some fictitious claims for entities that she controlled (that is, she would receive the payment), and she let Accounts Payable pay her.LO 17-15The Missing ControlSegregation of duties. The university had not properly segregated related purchasing activities. Lawrence was ordering items, receiving the items, and receiving the invoice. By receiving the invoice, he had control over the documents that were used to account for the purchase and thus was able to substitute a fake invoice.Total take: $475,000ANATOMY OF A FRAUDLawrence Fairbanks, the assistant vice-chancellor of communications at Aesop University, was allowed to make purchases of under $2,500 for his department without external approval. Unfortunately, he also sometimes bought items for himself, such as expensive antiques and other collectibles. How did he do it? He replaced the vendor invoices he received with fake vendor invoices that he created. The fake invoices had descriptions that were more consistent with the communications department’s purchases. He submitted these fake invoices to the accounting department as the basis for their journal entries and to the accounts payable department as the basis for payment.LO 17-16The Missing ControlSegregation of duties. Aggasiz Construction Company did not properly segregate record-keeping from physical custody. Angela had physical custody of the blank checks, which essentially was control of the cash. She also had record-keeping responsibility because she prepared the bank reconciliation.Total take: $570,000ANATOMY OF A FRAUDAngela Bauer was an accounts payable clerk for Aggasiz Construction Company. She prepared and issued checks to vendors and reconciled bank statements. She perpetrated a fraud in this way: She wrote checks for costs that the company had not actually incurred (e.g., fake taxes). A supervisor then approved and signed the checks. Before issuing the check, though, she would “white-out” the payee line on the check and change it to personal accounts that she controlled. She was able to conceal the theft because she also reconciled the bank account. That is, nobody else ever saw that the checks had been altered.LO 17-17The Missing ControlDocumentation procedures. Mod Fashions