Internal Control BY JUDITH PAQUETTE Learning Objectives Fraud
Internal Control BY JUDITH PAQUETTE
Learning Objectives Fraud Internal Control Discuss Cash and Accounting for Cash The Bank Reconciliation Cash Management Correcting Journal Entries
What is Fraud? Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.
Why does Fraud Happen?
Pressure “I have debts and they are coming due” “I owe money” “My friends invited me to Vegas, I really want to go” “My car payments are high” “My husband had surgery and we need the $ to pay the medical bills. ” "the scream" by Terry Freedman is licensed under CC BY-NC-ND 2. 0, RETRIEVED 8/27/19 "Debt and money troubles 2" by joereadpk is licensed under CC BY 2. 0 RETRIEVED 8/27/19
Rationalization “I earn a low wage. ” “I got passed over for promotion” “They “I’m NEVER RATIONALIZE SOMETHING THAT FEELS WRONG! make so much, they don’t need the money” only borrowing the $$. . . I’ll pay it back” “Everyone’s Coming Taking doing it, even the supervisor!” in late, but having someone else sign in supplies from the company
Opportunity… Company must try to reduce/eliminate opportunities. That is their job! This requires many elements of Internal Control http: //nymag. com/magazine/toc/2009 -03 -02. html Retrieved 8/24/19
Learning Objectives Fraud Internal Control Discuss Cash and Accounting for Cash The Bank Reconciliation Cash Management Correcting Journal Entries
The Sarbanes-Oxley Act, 2002 Companies must 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).
GOALs of Internal Control SAFEGUARD Assure a Company’s Assets Financial Statement are RELIABLE Assure EFFICIENCY of the Company’s operations Be in COMPLIANCE with Government Laws/Regulations
How do we do this? Control Risk Environment - commitment Assessment Control Activities – policies/procedures Information Monitoring & Communication – follow up! Sounds like the role of Management!
TYPES of Internal Control PREVENTION – deter a problem before IT HAPPENS DETECTION – discover a problem as soon as possible after it HAPPENS.
Elements of GOOD Internal Control 1. Establishment of responsibility 2. Segregation of duties 3. Hire Competent personnel 4. Documentation procedures (control numbers on all transactions) 5. Develop plans/budgets 6. Maintain adequate records (accounting) 7. Physical/electronic controls 8. Independent internal verification/Audits
Establishment of responsibility Control is most effective when only one person is responsible for a given task EXAMPLES: Cash Register Passwords to track transactions
Segregation of duties SEGREGATON OF DUTIES #a Related duties, including physical custody and record keeping, should be assigned to different individuals. #b Record-Keeping of assets s/b separated from Physical Custody of assets
Hire Competent personnel HUMAN RESOURCE CONTROLS 1. Bond employees. 2. Rotate employees’ duties and require vacations. Human resources 3. Conduct background checks. "POMINDS company profile (magazine)" by George Samuel, Penta Value is licensed under CC BY-NC-ND 4. 0 RETRIEVED 8/27/19
Documentation procedures (control numbers on all transactions) Companies should use prenumbered documents and account for all documents. (checks, invoices, purchase orders/reqs) Be able to trace each document back to transaction/person. Require approval signatures Account for missing checks!
Develop plans/budgets Establish By an Annual Plan Department Use for evaluating performance Also use as a “Road Map” – expenditures are planned, approved, expected Compare Actual performance to Budget (plan) Both a Prevention and a Detection Control
Maintain adequate records (accounting) Inspect/inventory Plant Assets Reconcile “books” to reality Take Physical Inventory and Adjust the books to match the physical inventory Accounts Receivable confirmation Accounts Payable confirmation
Physical/electronic controls Safes/vaults Warehouses Computers TV with passcodes monitors Time clocks Alarms Key cards/ID
Independent internal verification/Audits 1. Decides whether ADEQUATE Internal Controls are in place. 2. Decides whether Internal Controls are actually WORKING. 3. REPORT: Any “audit points” (areas for improvement)
Learning Objectives Fraud Internal Control Discuss The Cash and Accounting for Cash Bank Reconciliation Cash Management Correcting Journal Entries
On the Balance Sheet…. “Cash and Cash Equivalents” Includes: • All bank accounts • Short-term highly liquid investments • Examples: Treasury bills, commercial paper (short-term corporate notes), money market funds). "The Ones" by agross 96 is licensed under CC BY-NC-SA 2. 0 Retrieved 8/24/19
Cash Receipts – over-the-counter receipts One person assigned to a register Provide receipt to customer Keep record (register tape) of transactions Count cash when change personnel Match register tape to cash, checks, credit and debit card payments Store extra cash in safe with limited access Bond Personnel, require vacations "Walmart Check Out Cash Registers. With Bagging Carousel" by Jeepers. Media is licensed under CC BY 2. 0 Retrieved 8/24/19
Cash Receipts – over-the-counter receipts One person assigned to a register Establishment of Responsibility Provide receipt to customer Documentation Keep record (register tape) of transactions Documentation Count cash when change personnel Independent Internal Verification Match register tape to cash, checks, credit and debit card payments Independent Internal Verification Store extra cash in safe with limited access Physical Controls Bond Personnel, require vacations Human Resource Controls Have separate people assigned: Segregation of Duties at register who counts cash and stores in safe Who makes deposit at bank
Cash Receipts - mailed in receipts Mail should be opened by TWO people, checks should be endorsed, and a list of total checks prepared. Given All to safe cashier receipts deposited at bank Copy of bank statement sent to company treasurer to compare with deposit amount "Envelope" by Benjamin Apolo III is licensed under CC BY-NC-ND 4. 0 Retrieved 8/24/19
Petty Cash Fund - Used to pay small amounts. Involves: 1. establishing the fund, “Petty Cash” 2. making payments from the fund, (with proper documentation and authorization, e. g. , receipts) 3. replenishing the fund, (create the Journal Entry)
Learning Objectives Fraud Internal Control Discuss Cash and Accounting for Cash The Bank Reconciliation Cash Management Correcting Journal Entries
USING A BANK STATEMENT Using A Bank is a Good Internal Control It keeps cash on hand low It creates a double record of transactions It includes a BANK STATEMENT
Note: Ending Balance per the BANK is $6, 488. 95
The Bank Statement Rarely equals what the Company’s “books” have in the Cash Account ending Balance WHY? Timing Issues… The Book Balance is $5, 322. 69 "Check from My Scammer" by Telstar Logistics is licensed under CC BY-NC 2. 0 Retrieved 8/24/19
BANK RECONCILIATION – BANK STATEMENT TO COMPANY’S “BOOKS” Balance per BOOKS ____ Balance per BANK ____ PLUS: Deposits not Yet recorded by the Bank (and corrections) PLUS Deposits recorded by the BANK but not yet by The Company. (And corrections) LESS: Check not yet received by the BANK (and corrections) LESS: Disbursements recorded by the BANK but not yet by The Company. (And Corrections). = Adjusted Balance per BANK = = Adjusted Balance per BOOKS
Deposits in Transit - Checks (from customers) ADDED to the Company’s books but not yet recorded by the Bank. Assume three checks were added to the Company’s Cash balance, but do not yet appear on the Bank Statement, $225. Action: Add to Bank Balance.
Outstanding Checks – Checks deducted from the Company’s books, but not yet cashed Note the gap between Check # 166 and Check # 169 Checks 167 and 168 have NOT been Cashed; they are Outstanding. Additional information: Checks # 172 and #173 (disbursements) were recorded by the books, but NOT by the Bank Action: Deduct from Bank Balance. CHECK 167 168 172 173 $ $ AMOUNT 301. 66 149. 50 450. 00 240. 50 $ 1, 141. 66
Collection of a NOTE – The BANK collected a note and deposited it to the Company’s bank account, but it was not yet recorded by the Company) The Note Receivable was paid in full with Principal of $300. The Bank charged a $5 collection fee. (more fees…)
Other Charges – review the Bank Statement for additional charges and credits A check “bounced” (e. g. , it was returned because the customer did not have enough money) $35. 40. Also called NSF (Not Sufficient Funds) The BANK charge a $10 monthly service fee (welcome to the world of FEEs…) Action: Deduct from BOOK Balance.
WILSON CORPORATION – Bank Reconciliation Balance Per Bank PLUS: Deposits in Transit $ 6, 488. 95 Balance per books $ 5, 322. 69 $ PLUS: Collection of Note $ 300. 00 LESS: Collection Fee NSF Check Service Fee $ $ $ 5. 00 35. 40 10. 00 $ 50. 40 225. 00 LESS: Outstanding Checks 167 168 172 173 Adjusted Balance per Bank $ 301. 66 $ 149. 50 $ 450. 00 $ 240. 50 $ 1, 141. 66 $ 5, 572. 29 Adjusted Balance per Books $ 5, 572. 29
FINAL Step – Making the Journal Entries for the Bank Reconciliation You must create Journal Entries for ALL the items on the right side of the Bank Reconciliation, to get the Book Balance corrected: 1) To record a note collected, less a collection fee 2) To reclassify an NSF check back into Accounts Receivable (because it was NOT collected) 3) To book the Bank Service Charge
To record a note collected, less a collection fee
To reclassify an NSF check back into Accounts Receivable (because it was NOT collected)
To book the Bank Service Charge
Learning Objectives Fraud Internal Control Discuss Cash and Accounting for Cash The Bank Reconciliation Cash Management Correcting Journal Entries
Effective Cash Management Monitoring Primary Cash Activities of Cash Management
Effective Cash Management Manage Accounts Receivable! Manage Inventory Levels Manage Accounts Payable INVEST EXCESS CASH! https: //www. gobrightwing. com/2012/09/06/cost-of-failed-hire/flushingmoney-down-the-toilet-2/#!/ Retrieved 8/24/19
Learning Objectives Fraud Internal Control Discuss Cash and Accounting for Cash The Bank Reconciliation Cash Management Correcting Journal Entries
Correcting Journal Entries - supplement Or, how to fix, repair, undo mistakes in journal entries…. . BY JUDITH PAQUETTE
What happens…. When you book an entry incorrectly? How do you correct it? This video will provide 5 example journal entries with errors and I will discuss how to make the correcting journal entry. Using these as examples, you should be able to correct other types of journal entry errors.
Method: Once you identify the erroneous journal entry, you must fix the error. Use this method: Create, (but ONLY for your reference), the CORRECT journal entry Record a CORRECTION, which combines: A reversal of the error A correct journal entry
Example #1 – WRONG ACCOUNT: Hermes Company booked a collection of Cash on Account: Account Titles and Descriptions Debit June 15 Cash 1, 500 Service Revenue Credit 1, 500 Note the entry they SHOULD HAVE MADE(reference only, do not book as solution): # Date 1 June 15 Account Titles and Descriptions Debit Cash 1, 500 LY ! Error #1 Date Fo D r. R o no efe t b re oo nc k! e O N # Accounts Receivable Credit 1, 500
Hermes Company booked the correcting Journal Entry: # Error #1 Date Account Titles and Descriptions Debit June 15 Cash 1, 500 Service Revenue # Date CORR June 15 Credit 1, 500 Account Titles and Descriptions Debit Service Revenue 1, 500 Accounts Receivable Credit 1, 500
Example #2 – WRONG AMOUNT: On December 5, Hermes Company purchased a Truck for $45, 000, but recorded it as $4, 500: Account Titles and Descriptions Debit Dec 5 Equipment 4, 500 Accounts Payable Credit 4, 500 Note the entry they SHOULD HAVE MADE (reference only, do not book as solution): # Date 2 Dec 5 LY ! Error #2 Date Account Titles and Descriptions Debit Equipment 45, 000 Fo D r. R o no efe t b re oo nc k! e O N # Accounts Payable Credit 45, 000
Hermes Company booked the correcting Journal Entry: # Error #2 Date Account Titles and Descriptions Debit Dec 5 Equipment 4, 500 Accounts Payable # Date CORR Dec 5 Credit 4, 500 Account Titles and Descriptions Debit Equipment 40, 500 Accounts Payable Credit 40, 500
Example #3 – WRONG ACCOUNTS: On March 1, Hermes Company recorded a credit card sale for $1, 000. The credit card company charged 3% as a service charge. # Error #3 Date Account Titles and Descriptions Debit Mar 1 Accounts Receivable 1, 000 Sales Credit 970 Sales Discounts 30 Note the entry they SHOULD HAVE MADE (reference only, do not book as solution): 3 Mar 1 Account Titles and Descriptions LY ! Date Cash Fo D r. R o no efe t b re oo nc k! e O N # Service Charge Expense Sales Debit Credit 970 30 1, 000
Hermes Company booked the correcting Journal Entry: # Error #3 Date Account Titles and Descriptions Debit Mar 1 Accounts Receivable 1, 000 Sales Discounts # Date CORR Mar 1 Credit 970 30 Account Titles and Descriptions Cash Service Charge Expense Debit 970 30 Sales Discounts 30 Accounts Receivable Sales Credit 1, 000 30
Example #4 – WRONG AMOUNT: On August 31, Hermes Company booked an adjusting entry incorrectly. The Supplies account had a beginning balance of $350. During the month (August), an additional $700 of supplies was purchased. The ending balance in supplies was $400. # Date Account Titles and Descriptions Debit Error #4 Aug 31 Supplies Expense 350 Supplies Credit 350 Date 4 Aug 31 Account Titles and Descriptions Fo D r. R o no efe t b re oo nc k! e O N # LY ! Note the entry they SHOULD HAVE MADE (reference only, do not book as solution): Supplies Expense Supplies Debit Credit Supplies Exp 350 650 700 650 400 650 650
Hermes Company booked the correcting Journal Entry: # Date Account Titles and Descriptions Debit Error #4 Aug 31 Supplies Expense 350 Supplies # Date CORR Aug 31 Account Titles and Descriptions Supplies Expense Supplies Credit 350 Debit 300 Credit Supplies Exp 350 300 700 400 650 650
Example #5 – FLIPPED ACCOUNTS: On October 31, Hermes Company booked an adjusting entry incorrectly. The Supplies account had a beginning balance of $350. During the month (October), an additional $800 of supplies was purchased. The ending balance in supplies was $400. # Date Account Titles and Descriptions Debit Error #5 Oct 31 Supplies 750 Supplies Expense Credit 750 # Date 5 Oct 31 Fo D r. R o no efe t b re oo nc k! e O N LY ! Note the entry they SHOULD HAVE MADE(reference only, do not book as solution): Account Titles and Descriptions Debit Supplies Expense 750 Supplies Credit 750
Hermes Company booked the correcting Journal Entry: # Date Account Titles and Descriptions Debit Error #5 Oct 31 Supplies 750 Supplies Expense # Date CORR Oct 31 Credit 750 Account Titles and Descriptions Debit Supplies Expense 1, 500 Supplies Credit 1, 500
Note: You are ONLY required to do the Correcting Journal Entry You are NOT required to do the Reversal of the Bad entry Therefore, your ONE correcting JE, must take into account both: A reversal of the error A correct journal entry
The End GOOD BY AND GOOD LUCK!
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