Chapter 5: Fraud, Internal Control, and Cash

Fraud

________ can be defined as an attempt to deceive others for personal gain.

Fraud

________ affects both private and public companies and also has an affect on the economy.

Corruption
Asset Misappropriation
Financial Statement Fraud

The three categories for employee fraud:

Corruption

Misusing one's position and being dishonest for personal gain, commonly uses bribery.

Asset Misappropriation

Theft or embezzling cash, property, or private business information.

Financial Statement Fraud

The act of creating false financial statements to create a positive depiction of the company.

Incentive
Opportunity
Rationalization

The three factors that contribute to employee fraud, aka the fraud triangle:

Incentive

Employee has a reason to commit fraud, like making company look better and more appealing to investors.

loan covenant

A ________ requires meeting financial targets. If they aren't met, the company may face multiple consequences.

Opportunity

The employee has a means of committing fraud, may be due to weak internal control.

Rationalization

The employee perceives the misdeed as unavoidable or justified.

both private and public companies

Fraud effects:

Sarbanes Oxley Act (SOX)

The ________ was passed to help protect investors avoid fraud and establish financial regulations for companies.

Counteract incentives
Reduce opportunities
Encourage honesty

The requirements of SOX:

Internal control

________ involves people within a company enforcing policies to achieve objectives such as operations, reporting, and compliance.

The components of internal control systems

Control environment
Risk assessment
Information and communication
Monitoring activities

These components apply to all divisions in a company (entry level to higher up positions)

control activities

The principles of ________ correlate and strengthen the components of internal control.

The common principles of internal control:

Establish responsibility
Segregate duties
Restrict access
Document procedures
Independently verify

Establish responsibility

Giving tasks to individual employees makes it easier to detect errors.

Segregation of duties

________ is giving individual employees separate tasks and responsibilities in a process to avoid mistakes and create equal work. This is the most effective method for record keeping and monitoring those who don't have access to the company's assets.

Restrict access

Assets should be secured and used only to fulfill responsibilities. Physical assets should be locked up and electronic information should require a passcode.

Document procedures

Record activities within documents so they can be referred to later if needed.

Independently verify

Ensure employees are completing their tasks correctly and compare/review financial information.

control limitations

Two examples of ________ include implementing internal controls only to the extent their benefits exceed their costs and human error.

Cash receipts

________ is an internal control to ensure the appropriate amount of cash is gained.

Three important functions for in person cash exchanges:

Amount in transaction should be recorded.
Access to cash should be limited.
The total of cash sales should be documented.

Process for cash received through mail

Checks are mailed from customers who paid on account and mail clerks lists the amounts received on a cash receipt list.

remittance advice

With the cash mailed in from the customer, there is usually a ________ note that explains the payment.

Checks

________ must be stamped "For Deposit Only" so the bank doesn't exchange it for cash.

electronic funds transfer (EFT)

Cash received from ________ is when a customer transfers money from their bank account to the company's bank account. They also eliminate need for some internal controls.

EFTs

Company's prefer ________ because they are immediate.

Writing a check or completing an EFT to a supplier.
Pay employees via EFT.
A petty cash system

Cash payments involve:

cash payments

The primary goal of internal controls for all ________ is to ensure the business pays only for properly authorized transactions.

voucher

A(n) ________ system is a process for approving and documenting all purchases and payments made on account. A(n) ________ is a collection of documents prepared at each step in the system.

purchase requisition

Requesting a good or service to be ordered needs a ________.

order documentation

Ordering the goods or services requires purchase ________.

receiving report

Receiving goods or services requires a ________.

supplier invoice

Getting billed for goods or services requires a ________.

EFT transaction number

Writing a check or using an EFT to pay a bill requires a check or an ________.

Robotic process automation (RPA)

________ is a software that combines automation and artificial
intelligence to perform certain responsibilities

imprest payroll system

A(n) ________ is used to pay employees and restricts the total amount paid to others by limiting the amount of money available to be transferred.

The special payroll account should be 0 after employees are paid. An error has occurred if the balance is above or below 0.

The total net pay of all employees is moved into a special account, which is later transferred into the individual employee's checking accounts. You can tell there is an error when.....

petty cash fund

A(n) ________ is a system used to reimburse employees for expenditures they may have made on behalf of the organizations.

bank reconciliation

The process of comparing two sets of records creates a report called ________, which provides independent verification of all cash transactions the bank has processed for the company. They are created monthly.

The current balance.
A transaction description.
Withdrawals made (if any).
Deposits made (if any).
The overall balance of the account.

The typical format of a bank statement:

Clearing a check.

After the check writer's bank withdraws the amount of the check from the check writer's account, it will be reported as a deduction on the bank statement. This is also known as ________.

increased

Banks account balances are ________ when checks are deposited, interest is earned, and funds are transferred electronically.

decreased

Bank account balances are ________ when service fees are charged and funds are transferred out electronically.

bank's

The bank statement is presented from the ________ point of view.

liability

A company's account balance is considered a(n) ________ to the bank.

Credit memo

Increased liabilities are credited on the bank statement.

Debit memo

Decreased amounts are debited on the bank statement.

Errors made by the bank
Time lag
Interest
EFTs
Service charges
Company errors/your own errors

The bank reconciliation process involves comparing a company's records to their bank statement to see if they
match up. The company's record may be different because:

Deposit in transit

________ refers to depositing a check after "closing time" and will be processed the next day.

Outstanding checks

________ is a type of lag where the bank doesn't know about the company's deposit until the company deposits the check into its own bank, which notifies the other bank.

NSF

________ (non- sufficient funds) checks are checks from your customers that were rejected due to the insufficient balance is the the customers personal bank account.

Deposited cash with banks
Petty cash
Cash equivalents

Cash on the balance sheet includes:

Cash equivalents

________ are short term and highly liquid investments purchased within three months of maturity. They are readily convertible to known amounts of cash. There is little risk their value will change.

Certificates of deposit (CDs)
Money market funds
Government Treasury bills
Other highly liquid investments

Cash equivalents can include:

Restricted cash

________ is money a company must legally set aside for purposes not related to day to day
operations. It is reported separately on the balance sheet.

current asset

Restricted cash used within a year is a(n) ________.

non-current asset

Restricted cash not used within a year is a(n) ________.