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.
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.