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Slide
7-1


Chapter

7

Fraud, Internal
Control, and Cash
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
7-2


Study
Study Objectives
Objectives

Slide
7-3

1.

Define fraud and internal control.

2.

Identify the principles of internal control activities.

3.

Explain the applications of internal control principles to cash
receipts.

4.

Explain the applications of internal control principles to cash
disbursements.

5.

Describe the operation of a petty cash fund.

6.

Indicate the control features of a bank account.

7.

Prepare a bank reconciliation.

8.

Explain the reporting of cash.


Fraud,
Fraud, Internal
Internal Control,

Control, and
and Cash
Cash

Fraud
Fraudand
and
Internal
Internal
Control
Control
Fraud
Internal control
Principles of
internal control
activities
Limitations

Slide
7-4

Cash
CashReceipts
Receipts
Controls
Controls

Over-thecounter
receipts
Mail receipts

Cash
Cash
Disbursement
Disbursement
Controls
Controls
Voucher
system
controls
Petty cash
fund controls

Control
Control
Features:
Features:Use
Use
of
ofaaBank
Bank
Making
deposits
Writing checks
Bank
statements
Reconciling
the bank
account
Electronic

funds transfer
(EFT) system

Reporting
Reporting
Cash
Cash

Cash
equivalents
Restricted
cash
Compensating
balances


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

Illustration 7-1

Why does
fraud occur?

Slide
7-5

SO 1 Define fraud and internal control.


Answer on
notes page
Slide
7-6


Fraud
Fraud and
and Internal
Internal Control
Control
Internal Control
Methods and measures adopted to:

Slide
7-7

1.

Safeguard assets.

2.

Enhance accuracy and reliability of accounting records.

3.

Increase efficiency of operations, and

4.

Ensure compliance with laws and regulations.

SO 1 Define fraud and internal control.


Fraud
Fraud and
and Internal
Internal Control
Control
Internal Control
Internal control systems have five primary components
A control environment
Risk assessment
Control activities
Information and communication
Monitoring

Slide
7-8

SO 1 Define fraud and internal control.

Fraud
Fraud and
and Internal
Internal Control
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:







Slide
7-9

Establishment of responsibility
Segregation of duties
Documentation procedures
Physical controls
Independent internal verification
Human resource controls
SO 2 Identify the principles of internal control activities.

Fraud
Fraud and
and Internal
Internal Control
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 and all
documents should be accounted for.
Slide
7-10

SO 2 Identify the principles of internal control activities.


Fraud
Fraud and
and Internal
Internal Control
Control

Slide
7-11

SO 2


Fraud
Fraud and
and Internal
Internal Control
Control

Slide
7-12

SO 2 Identify the principles of internal control activities.


Fraud
Fraud and
and Internal
Internal Control
Control

Slide
7-13

SO 2


Fraud
Fraud and
and Internal

Internal Control
Control
Principles of Internal Control Activities
PHYSICAL CONTROLS

Slide
7-14

Illustration 7-2

SO 2 Identify the principles of internal control activities.


Fraud
Fraud and
and Internal
Internal Control
Control
Principles of Internal Control Activities
INDEPENDENT INTERNAL
VERIFICATION

Illustration 7-3

1. Verify records periodically
or on a surprise basis.
2. Verify records by an
employee who is
independent.
3. Discrepancies reported

to management.
Slide
7-15

SO 2 Identify the principles of internal control activities.


Fraud
Fraud and
and Internal
Internal Control
Control
Principles of Internal Control Activities
HUMAN RESOURCE CONTROLS

1. Bond employees.
2. Rotate employees’ duties and
require vacations.
3. Conduct background checks.

Slide
7-16

SO 2 Identify the principles of internal control activities.


Fraud
Fraud
and

and
Internal
Internal
Control
Control

Slide
7-17

SO 2


Fraud
Fraud and
and Internal
Internal Control
Control

Slide
7-18

SO 2


Fraud
Fraud and
and Internal
Internal Control
Control

Slide
7-19

SO 2


Slide
7-20

Answer on
notes page


Fraud
Fraud and
and Internal
Internal Control
Control
Limitations of Internal Control
Costs should not exceed benefit.
Human element.
Size of the business.

Slide
7-21

SO 2 Identify the principles of internal control activities.


Cash

Cash Receipts
Receipts Controls
Controls
Over-the-Counter Receipts

Slide
7-22

Illustration 7-4

Establishment of
Responsibility

Documentation
Procedures

Independent Internal
Verification

Only designated
personnel are authorized
to handle cash receipts
(cashiers)

Use remittance advice
(mail receipts), cash
register tapes, and
deposit slips

Supervisors count cash

receipts daily; treasurer
compares total receipts
to bank deposits daily

Segregation of Duties

Physical Controls

Different individuals
receive cash, record
cash receipts, and hold
the cash

Store cash in safes
and bank vaults; limit
access to storage
areas; use cash
registers

Human Resource
Controls
Bond personnel who
handle cash; require
employees to take
vacations; deposit all
cash in bank daily

SO 3 Explain the applications of internal control principles to cash receipts.

Cash
Cash Receipts
Receipts Controls
Controls
Cash consists of coins, currency, checks, money orders, and
money on hand or on deposit in a bank.
Cash receipts come from:
cash sales
collections on account from customers
receipt of interest, rent, and dividends
investments by owners
bank loans
proceeds from the sale of noncurrent assets
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7-23

SO 3 Explain the applications of internal control principles to cash receipts.


Over-theCounter
Receipts

Illustration 7-5

Slide
7-24

SO 3 Explain the applications of internal control principles to cash receipts.

Cash
Cash Receipts
Receipts Controls
Controls
Mail Receipts
Mail receipts should be opened by two people, a list
prepared, and each check endorsed.
Copy of the list, along with the checks and remittance
advices, sent to cashier’s department.
Cashier adds the checks to the over-the-counter receipts,
prepares a daily cash summary and makes the daily bank
deposit.
Copy of list sent to treasurer’s office for comparison with
total shown on daily cash summary.
Slide
7-25

SO 3 Explain the applications of internal control principles to cash receipts.