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Internal control

bank reconciliation
statement
2

Learning Outcome

1.   Define fraud and internal control.
2. Identify the principles of internal control.
3. Indicate the control features of a bank
   account.
4. Prepare a bank reconciliation.
5. Explain the reporting of cash.
3


Fraud and Internal Control
 Fraud
   Dishonest act by an employee that results in personal
   benefit to the employee at a cost to the employer.




    Why does
    fraud occur?
4

Fraud and Internal Control

   Internal Control
   Methods and measures adopted to:
    1.   Safeguard assets.
    2. Enhance accuracy and reliability of accounting
       records.
    3. Increase efficiency of operations, and
    4. Ensure compliance with laws and regulations.
5


Fraud and Internal Control
Principles of Internal Control
Activities
Measures vary with
   management’s assessment of the risks faced.
   size and nature of the company.
Six principles of controls activities:
       Establishment of responsibility
       Segregation of duties
       Documentation procedures
       Physical controls
       Independent internal verification
       Human resource controls
6

 Fraud and Internal Control
Principles of Internal Control
Activities
 ESTABLISHMENT OF RESPONSIBILITY
   Control is most effective when only one person is responsible for
   a given task.
 SEGREGATON OF DUTIES
   Related duties, including physical custody and record keeping,
   should be assigned to different individuals.
 DOCUMENTATION PROCEDURES
   Companies should use prenumbered documents for all
   documents should be accounted for.
7

Fraud and Internal Control
Principles of Internal Control
Activities
PHYSICAL CONTROLS
8

Fraud and Internal Control
Principles of Internal Control
Activities
INDEPENDENT INTERNAL
VERIFICATION
 1. Verify records periodically
    or on a surprise basis.
 2. Records verified by an
    employee who is
    independent.
 3. Discrepancies reported
    to management.
9

Fraud and Internal Control
Principles of Internal Control
Activities
HUMAN RESOURCE CONTROLS
  1.   Bond employees.
  2. Rotate employees’ duties and
     require vacations.
  3. Conduct background checks.
10

LIMITATIONS OF INTERNAL CONTROL

 Costs of establishing control procedures
  should not exceed their expected benefits

 The human element is an important factor
  in every system of internal control. A good
  system can become ineffective through
  employee fatigue, carelessness, or indifference.

 Collusion may result.
   • Two or more individuals work together to
     get around prescribed controls and may
     significantly impair the effectiveness of a
     system.
11
12
13
14
15
16


Bank statement
• It is document used by the bank to report the
  transaction of the depositor.
• It shows the bank account beginning and
  ending balance of a period conducted through
  the bank.
• It shows the cheque cleared (paid) by the bank
  and deposits received by the bank.
• The statement also includes other changes in
  the account.
17



Bank Reconciliation
• The balance in the business cash at bank account
  rarely equals the balance shown on the bank
  statement.
• The difference arises because of time lag and
  errors made in the business records or by the
  bank.
• A bank reconciliation ensures that all cash
  transaction have been accounted for and that the
  bank and book records of cash are correct.
18



Items recorded by the business
These are item that has not been recorded by the
 bank
• Deposit in transit / Unrecorded deposits /
   outstanding cheques
• Unpresented cheques / outstanding cheques
• Errors made by the business
19




Items recorded by the bank
These item are not shown in the business cash
account
• Bank collection
• Electronic fund transfers
• Service charges
• Interest revenue on cheque or savings account
• Dishonoured cheques received from customers
• Errors made by the bank – accidental deposits
  or accidental withdrawal.
20



 Steps in preparing Bank
 reconciliation
Reconcile balance per books and balance per bank to their adjusted
(corrected) cash balances. This is because the balances between
them seldom has the same balance.

 If the items are missing from bank statement – adjust bank side of
reconciliation
If the items are missing from book balance-adjust book side of
Reconciliation
21

     Example
The following information pertains to Family Video Company.
1.   Cash balance per bank, July 31, $7,263.
2.   Cash balance per books, July 31, $7,284.
3.   July bank service charge not recorded by the depositor $28.
4.   Deposits in transit, July 31, $1,500.
5.   Bank collected $900 note for Family in July, plus interest
     $36, less fee $20.The collection has not been recorded by
     Family, and no interest has been accrued.
6.   Outstanding checks, July 31, $591.
Instructions
a) Prepare a bank reconciliation at July 31.
b) Journalize the adjusting entries at July 31 on the books of Family
   Video Company.
22

         Solutions
a) Prepare a bank reconciliation at July 31.
  Cash balance per bank statement             $7,263
  Add:    Deposit in transit                1,500
  Less:   Outstanding checks                (591)
  Adjusted cash balance per bank           $8,172

  Cash balance per books                   $7,284
  Add:    Collection of notes receivable       900
          Collection of interest               36
  Less:   Bank service charge                (28)
          Note collection fee                (20)
  Adjusted cash balance per books          $8,172
23

Solution - Journals
b) Journalize the adjusting entries at July 31 on the
books of Family Video Company.
                                           Dr.      Cr.
July 31      Cash                           888
             Bank charge expense             28
             Miscellaneous expense           20
                Notes receivable                    900
                Interest revenue                     36

  Note: Adjusting journal entry includes only the
  adjustments to the cash balance per books.

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Acc 279 bank recon

  • 2. 2 Learning Outcome 1. Define fraud and internal control. 2. Identify the principles of internal control. 3. Indicate the control features of a bank account. 4. Prepare a bank reconciliation. 5. Explain the reporting of cash.
  • 3. 3 Fraud and Internal Control Fraud Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. Why does fraud occur?
  • 4. 4 Fraud and Internal Control Internal Control Methods and measures adopted to: 1. Safeguard assets. 2. Enhance accuracy and reliability of accounting records. 3. Increase efficiency of operations, and 4. Ensure compliance with laws and regulations.
  • 5. 5 Fraud and Internal Control Principles of Internal Control Activities Measures vary with management’s assessment of the risks faced. size and nature of the company. Six principles of controls activities:  Establishment of responsibility  Segregation of duties  Documentation procedures  Physical controls  Independent internal verification  Human resource controls
  • 6. 6 Fraud and Internal Control Principles of Internal Control Activities ESTABLISHMENT OF RESPONSIBILITY Control is most effective when only one person is responsible for a given task. SEGREGATON OF DUTIES Related duties, including physical custody and record keeping, should be assigned to different individuals. DOCUMENTATION PROCEDURES Companies should use prenumbered documents for all documents should be accounted for.
  • 7. 7 Fraud and Internal Control Principles of Internal Control Activities PHYSICAL CONTROLS
  • 8. 8 Fraud and Internal Control Principles of Internal Control Activities INDEPENDENT INTERNAL VERIFICATION 1. Verify records periodically or on a surprise basis. 2. Records verified by an employee who is independent. 3. Discrepancies reported to management.
  • 9. 9 Fraud and Internal Control Principles of Internal Control Activities HUMAN RESOURCE CONTROLS 1. Bond employees. 2. Rotate employees’ duties and require vacations. 3. Conduct background checks.
  • 10. 10 LIMITATIONS OF INTERNAL CONTROL  Costs of establishing control procedures should not exceed their expected benefits  The human element is an important factor in every system of internal control. A good system can become ineffective through employee fatigue, carelessness, or indifference.  Collusion may result. • Two or more individuals work together to get around prescribed controls and may significantly impair the effectiveness of a system.
  • 11. 11
  • 12. 12
  • 13. 13
  • 14. 14
  • 15. 15
  • 16. 16 Bank statement • It is document used by the bank to report the transaction of the depositor. • It shows the bank account beginning and ending balance of a period conducted through the bank. • It shows the cheque cleared (paid) by the bank and deposits received by the bank. • The statement also includes other changes in the account.
  • 17. 17 Bank Reconciliation • The balance in the business cash at bank account rarely equals the balance shown on the bank statement. • The difference arises because of time lag and errors made in the business records or by the bank. • A bank reconciliation ensures that all cash transaction have been accounted for and that the bank and book records of cash are correct.
  • 18. 18 Items recorded by the business These are item that has not been recorded by the bank • Deposit in transit / Unrecorded deposits / outstanding cheques • Unpresented cheques / outstanding cheques • Errors made by the business
  • 19. 19 Items recorded by the bank These item are not shown in the business cash account • Bank collection • Electronic fund transfers • Service charges • Interest revenue on cheque or savings account • Dishonoured cheques received from customers • Errors made by the bank – accidental deposits or accidental withdrawal.
  • 20. 20 Steps in preparing Bank reconciliation Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances. This is because the balances between them seldom has the same balance. If the items are missing from bank statement – adjust bank side of reconciliation If the items are missing from book balance-adjust book side of Reconciliation
  • 21. 21 Example The following information pertains to Family Video Company. 1. Cash balance per bank, July 31, $7,263. 2. Cash balance per books, July 31, $7,284. 3. July bank service charge not recorded by the depositor $28. 4. Deposits in transit, July 31, $1,500. 5. Bank collected $900 note for Family in July, plus interest $36, less fee $20.The collection has not been recorded by Family, and no interest has been accrued. 6. Outstanding checks, July 31, $591. Instructions a) Prepare a bank reconciliation at July 31. b) Journalize the adjusting entries at July 31 on the books of Family Video Company.
  • 22. 22 Solutions a) Prepare a bank reconciliation at July 31. Cash balance per bank statement $7,263 Add: Deposit in transit 1,500 Less: Outstanding checks (591) Adjusted cash balance per bank $8,172 Cash balance per books $7,284 Add: Collection of notes receivable 900 Collection of interest 36 Less: Bank service charge (28) Note collection fee (20) Adjusted cash balance per books $8,172
  • 23. 23 Solution - Journals b) Journalize the adjusting entries at July 31 on the books of Family Video Company. Dr. Cr. July 31 Cash 888 Bank charge expense 28 Miscellaneous expense 20 Notes receivable 900 Interest revenue 36 Note: Adjusting journal entry includes only the adjustments to the cash balance per books.