Chapter 8 Fraud Internal Control and Cash OPEN

Chapter 8 Fraud, Internal Control, and Cash OPEN CH 8 OUTLINE Chapter 8 -1 Accounting Principles, Ninth Edition

Read Ch 8 & DO: ONLINE QUESTIONS on website Chapter 8 -2

Study Objectives 1. Define fraud and internal control. 2. Identify the principles of internal control. 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. Chapter 8 -3

Fraud and Internal Control The Sarbanes-Oxley Act Companies must STOP FRAUD BY: develop principles of control over financial reporting. continually verify that controls are working. Independent auditors must attest to the adequacy of internal control. SOX created the Public Company Accounting Oversight Board (PCAOB). Chapter 8 -4 SO 1 Define fraud and internal control.

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? Chapter 8 -5 SO 1 Define fraud and internal control.

Match each situation with the following reasons why fraud can be committed. Use these words: Financial Pressure, Rationalization, or Opportunity 1. An employee monthly credit card payments are nearly 75% of their monthly earnings. 2. An employee earns minimum wage at a firm that has reported very high profits every year. 3. An employee is a big gambler. 4. An employee has check writing, signature and bank reconciliation responsibilies at a small firm. Chapter 8 -6

Control Features: Use of a Bank Contributes to good internal control over cash. Minimizes the amount of currency on hand. Creates a double record of bank transactions. Bank reconciliation. Chapter 8 -7 SO 6 Indicate the control features of a bank account.

ENDORSEMENTS Ø The reason you endorse a check is to either deposit it or to sign it over to someone else. Ø When endorsing a check, you turn the check over, and sign it on the back of the check. Chapter 8 -8

Types of Endorsements (these are all in the CH 8 outline) BLANK ENDORSEMENT - Sign your name the same way it appears on the front of the check. If it is spelled wrong on the front, then sign it again correctly. IMPORTANT - Do not sign your check with a blank endorsement until you are about to either cash or deposit it, otherwise someone else could potentially try to cash your check. Anyone can cash a check once you endorse a check with a blank endorsement. ENDORSE CHECK HERE John Smith Chapter 8 -9

Types of Endorsements (con’t) RESTRICTIVE ENDORSEMENT - This is the safer method to endorse your check and is recommended if you are mailing or someone else is depositing your check. Before signing your check, write a phrase such as "For deposit Only", or "For deposit to account number. . . " and then sign your same underneath. Then the check may only be deposited to either the bank or to your specific bank account. ENDORSE CHECK HERE For Deposit Only John Smith OR ENDORSE CHECK HERE For deposit to account no. 0358247 John Smith Chapter 8 -10

Types of Endorsements (con’t) SPECIAL ENDORSEMENT - This method allows you to sign your check over to someone else (a third party) who may then deposit it or cash it. Write "Pay to the order of" and then the name of the person you are giving the check to. Then, as above, sign your name underneath. Now you can give your check to that individual. ENDORSE CHECK HERE Pay to the order of Lisa Reynolds John Smith Chapter 8 -11

ENDORSEMENT EXERCISE PRACTICE: Which endorsement is used when the payee writes the words “For Deposit Only” above the endorsement? a)blank b)restrictive c)special d)Joint l. A check is written to Taylor Thomas. On the back of the check, Taylor writes “Pay to the order of Rose Dryer, ” then signs her name. What kind of endorsement is this? a)blank b)restrictive c)special d)Joint Chapter 8 -12

PRACTICE 1. You are in the bank and need to get cash for this weekend’s football game. You remember that your friend wrote you a check to repay you for buying her movie ticket last week. What should you do in order to cash this check? l 2. You have bounced a check to your landlord three months in a row. Your landlord refuses to take personal checks from you anymore. It is Friday afternoon, the banks have closed, and if you do not pay your rent, you have to be out in the morning. You just received a paycheck that is the exact amount of the rent, but the banks are all closed, what can you do? l 3. The office manager is running to the bank. You really need to deposit the paycheck you just received, but are afraid that you will not be able to make it to the bank before they close for the weekend. You think about sending the check with the office manager – how could you do this? Chapter l l 8 -13

Control Features: Use of a Bank –SEE OUTLINE # 25 Making Bank Deposits Authorized employee should make deposit. Front Side Chapter 8 -14 Illustration 8 -8 Bank Code Numbers Reverse Side SO 6 Indicate the control features of a bank account.

Sample Check Write a check for $2525. 25 to Home Depot for supplies Chapter 8 -15

Control Features: Use of a Bank –SEE OUTLINE # 25 Illustration 8 -9 Writing Checks Written order signed by depositor directing bank to pay a specified sum of money to a designated recipient. Maker Payee Payer Chapter 8 -16 SO 6 Indicate the control features of a bank account.

Control Features: Use of a Bank Statements Illustration 8 -10 Debit Memorandum Bank service charge NSF (not sufficient funds) Credit Memorandum Collect notes receivable. Interest earned. Chapter 8 -17 SO 6 Indicate the control features of a bank account.

KEY POINTS TO REMEMBER FOR A BANK RECONCILIATION: located in top of CH 8 OUTLINE Chapter 8 -18 l A check returned by the bank marked "NSF" means: ______. l On a bank reconciliation, deposits in transit are _______ to the bank balance. l In preparing a bank reconciliation, outstanding checks are ______ from the balance per bank.