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BSAD 221 Introductory Financial Accounting Donna Gunn, CA. Types of Fraud. Misappropriation of Assets Essentially theft of assets Fraudulent Financial Reporting False or misleading financial statements Earnings management is the most common. The Fraud Triangle. Motive. Rationalization.
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Types of Fraud • Misappropriation of Assets • Essentially theft of assets • Fraudulent Financial Reporting • False or misleading financial statements • Earnings management is the most common
The Fraud Triangle Motive Rationalization Opportunity
Internal Controls Plans designed by management and the Board of Directors to deal with risks related to: • Reliability of financial records and reporting • Ability to operate effectively and efficiently • Compliance with legal requirements
Control Activities • Competent People • Separation of duties • Monitor Employees • Limit Access to Assets/Records • Proper Approval/Authorization • Proper Safeguard Controls • Adequate Records
Competent People The most important feature of control is the people who make the system work. • High turnover in the business means inexperienced people • Incompetent people make mistakes!
Separation of Duties The duties that should be segregated are: • authorization to execute transactions, • recording of transactions, • custody of assets
Monitor Employees All employees should be monitored • Compliance with policies • Compare to budget If feasible, use internal audit
Limited Access Assets and records should not be available to persons who have no need to handle them.
Proper Approval/Authorization • Ensures unauthorized transactions are not occurring, which could result in inefficiencies and/or fraud
Proper Safeguard Controls Examples • Mandatory vacation/job rotation • Use security cameras • Backup files / store documents in fireproof vault
Adequate Records • Supporting documentation so transactions can be retraced if necessary • E.g. PO’s, Invoices, Receiving Report, Cheque, etc.
Ensure the accuracy of financial records. Properly account for assets. Safeguard assets. Internal Control of Cash Internal control refers to policies and procedures that are designed to: Cash is the asset most susceptible to theft and fraud.
Bank Reconciliation Explains the difference between cash reported on bank statement and cash balance on company’s books. Provides information for reconciling journal entries.
Bank Reconciliation Balance per Bank Balance per Book + Deposits by Bank (credit memos) + Deposits in Transit - Service Charge - NSF Cheques - Outstanding Cheques ± Bank Errors ± Book Errors = Correct Balance = Correct Balance
All reconciling items on the book side require an adjusting entry to the cash account. Balance per Bank Balance per Book + Deposits by Bank (credit memos) + Deposits in Transit - Service Charge - NSF Cheques - Outstanding Checks ± Bank Errors ± Book Errors = Adjusted Balance = Correct Balance Bank Reconciliation
Bank Reconciliation Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Simmons Company. The July 31 bank statement indicated a cash balance of $9,610, while the cash ledger account on that date shows a balance of $7,430. Additional information necessary for the reconciliation is shown on the next page.
Bank Reconciliation • Outstanding cheques totaled $2,417. • A $500 cheque mailed to the bank for deposit had not reached the bank at the statement date. • The bank returned a customer’s NSF cheque for $225 received as payment of an account receivable. • The bank statement showed $30 interest earned on the bank balance for the month of July. • Cheque 781 for supplies cleared the bank for $268 but was erroneously recorded in our books as $240. • A $486 deposit by Acme Company was erroneously credited to our account by the bank.
