Chapter 8 Cash, Fraud, and Internal Control

Establish responsibilities

Responsibility for a task should be assigned to one person. If responsibility is not established, determining who is at fault is difficult.

Maintain adequate records

Good record keeping helps protect assets and helps managers monitor company activities.

Insure assets and bond key employees

Assets should be insured, and employees handling cash and easily transferable assets should be bonded

Separate recordkeeping from custody of assets

An employee who has access to an asset must not have access to that asset’s accounting records.

Divide responsibility for related transactions

Responsibility for a transaction should be divided between two or more individuals or departments. One person’s work is a check on the others to prevent errors. This is not duplication of work.

Apply technological controls

Use technology such as ID scanners to protect assets and improve control.

Perform regular and independent reviews

Regular reviews of internal controls should be performed by outside reviewers, preferably auditors

Cash Account

Includes currency, coins, checks, and deposits in bank accounts

Cash equivalents

Short-term, liquid investment assets meeting two criteria (1) convertible to a known cash amount and (2) close to their due date usually within 3 months. An example is a U.S. Treasury bill.

Voucher system

Set of procedures to control cash payments. Applied to all payments.

Petty cash

System of control used for small payments

Canceled checks

Checks the bank has paid and deducted from the customer’s account.

Cash Accounts

Bank Accounts backed by currency, coins, checks, and deposits

Petty Cash

Small amount of money available readily for paying small expenses over writing a check or using a credit card

Voucher System

a control used to ensure cash is only spent on authorized purchases. Applied to all cash payments.

Bank Reconciliation

covers book balance and bank balance adjustments

Entries from bank reconciliation

compare cash balance on the balance sheet to the corresponding amount in the bank statement

Goals of Cash Management

-Plan Cash receipts to meet cash payments when due.

-Keep a minimum level of cash necessary to operate

Cash Management Strategies

-Encourage collections of receivables

-Delay payment of liabilities

-Keep only necessary levels of assets

-Plan expenditures.

-Invest excess cash.

Most large thefts in a company come from payments of:

Fake Invoices

Voucher System Establishes procedures for

-Verifying, approving, and recording liabilities for cash payments

-Issuing checks for payment of verified, approved and recorded liabilities

Check

Signed by the depositor instructing the bank to pay a specified

Signature Card

Used by bank employees to verify signature on checks

Deposit Ticket

List items such as currency and checks along with their dollar amounts

Electronic Funds Transfer

Signed by the depositor instructing the bank to pay a specified amount of money to a designated recipient

Deductions on a bank statement

canceled checks, bank service fees, and Uncollectible checks deposited during the period