Accounting Tools for Business Decision Making Eighth Edition Kimmel Weygandt Mitchell Fraud Internal Control and Cash This slide deck contains animations Please disable animations if they cause issues with your device University of North Florida Chapter 7 Prepared by Diane Tanner Chapter Outline Learning Objectives L O 1 Define fraud and the principles of internal control L O 2 Apply internal control principles to cash L O 3 Identify the control features of a bank account L O 4 Explain the reporting of cash and the basic principles of cash management Learning Objective 1 Describe Fraud and the Principles of Internal Control L O 1 Fraud and Internal Control A dishonest act by an employee that results in personal benefit to the employee at a cost to the employer Fraud triangle o Three factors that contribute to fraudulent activity L O 1 Fraud Triangle Factors Opportunity When the workplace lacks sufficient controls to deter and detect fraud Financial Pressure When employees have personal financial problems caused by too much debt or a desire to lead a lifestyle they cannot afford on their current salary Rationalization Employees believing their dishonest actions are justified L O 1 The Sarbanes Oxley Act SOX Resulted from corporate scandals in early 2000s Applies to publicly traded U S corporations Required to maintain a system of internal control Corporate executives and boards of directors must ensure that the 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 L O 1 Internal Control A process designed to provide reasonable assurance regarding the achievement of company objectives related to operations reporting and compliance Purposes o To safeguard assets o To enhance the reliability of accounting records o To increase efficiency of operations o To ensure compliance with laws and regulations L O 1 Primary Components of Internal Control Systems From COSO s Internal Control Integrated Framework A control environment Risk assessment Control activities Information and communication Monitoring L O 1 Principles of Internal Control Activities Establishment of responsibility Segregation of duties Documentation procedures Physical controls Independent internal verification Human resource controls L O 1 Establishment of Responsibility Assign responsibility to specific employees Most effective when only one person is responsible for a given task Often requires limiting access only to authorized personnel and then identifying those personnel L O 1 Segregation of Duties Applications activities Rationale o Different individuals should be responsible for related o Responsibility for record keeping for an asset should be separate from physical custody of that asset o The work of one employee should without a duplication of effort provide a reliable basis for evaluating the work of another employee L O 1 Segregation of Related Purchasing Activities Assign related purchasing activities to different individuals Decreases the potential for errors and irregularities To avoid kickbacks that may occur if a purchasing agent is allowed to order goods without obtaining supervisory approval To avoid the creation of a fictitious invoice that may occur if an employee who orders goods also handles the invoice and receipt of the goods and payment authorization L O 1 Segregation of Related Sales Activities Assign related sales activities to different individuals Decreases the potential for errors and irregularities o To avoid an increase in sales commissions by making sales at unauthorized prices May occur if a salesperson can make a sale without obtaining supervisory approval o To avoid an employee shipping goods to himself May occur if a shipping clerk also has access to accounting records o To avoid understatement of the amount billed for sales made to friends and relatives L O 1 Segregation of Recordkeeping from Physical Custody Two controls o Accountant should have neither physical custody of the asset nor access to assets o Custodian of the asset should not maintain or have access to the accounting records Reduces the likelihood that the custodian of the asset will convert the asset to personal use Especially important for cash and inventories L O 1 Physical Controls Relate to the safeguarding of assets and enhance the accuracy and reliability of the accounting records L O 1 Independent Internal Verification Involves the review of data prepared by employees Useful in comparing recorded accountability with existing assets Required to obtain maximum benefit o Independent employee should verify records periodically or on a surprise basis o Report discrepancies to management L O 1 Comparing Segregation of Duties with Independent Internal Verification Principle L O 1 Human Resource Controls Bond employees who handle cash o Involves obtaining insurance protection against theft by employees Rotate employees duties and require vacations o Deters employees from attempting thefts since they will not be able to permanently conceal their improper actions Conduct background checks L O 1 Data Analytics and Internal Controls Data analytics enable a company to Employ continuous monitoring of virtually every transaction o Identifies spikes or developing trends timely o Allows investigations to be made more quickly Examples Systems can automatically identify who recorded a particular journal entry o Helps to ensure that the segregation of duties control principle is not violated Recipients of large dollar amounts in risky areas can be flagged L O 1 Limitations of Internal Control Internal control is designed to provide reasonable assurance of safeguarding of assets and reliability of the accounting records Costs should not exceed benefits o Human element Affected by employee fatigue carelessness or indifference Reduced effectiveness by collusion o Size of the business Difficult for small companies to segregate duties or to provide for independent internal verification L O 1 Learning Objective 2 Apply Internal Control Principles to Cash L O 2 Cash Controls The one asset that is readily convertible into any other type of asset Easily concealed and transported and is highly desired The asset most susceptible to fraudulent activities May result in numerous errors because of the large volume of cash transactions Requires effective internal control over cash L O 2 Cash Receipts Controls L O
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