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
Opportunity
Rationalization
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.
Internal Control of Cash
Internal control refers to policies and
procedures that are designed to:
Properly
account for
assets.
Safeguard
assets.
Ensure the
accuracy of
financial
records.
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 in Transit
+ Deposits by Bank
(credit memos)
- Outstanding Cheques
- Service Charge
- NSF Cheques
± Bank Errors
± Book Errors
= Correct Balance
= Correct Balance
Bank Reconciliation
Balance per Bank
+ Deposits in Transit
All reconciling
items on the book
side require
an
- Outstanding
Checks
adjusting entry to
the cash account.
Balance per Book
+ Deposits by Bank
(credit memos)
- Service Charge
- NSF Cheques
± Bank Errors
± Book Errors
= Adjusted Balance
= Correct Balance
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
1) Outstanding cheques totaled $2,417.
2) A $500 cheque mailed to the bank for deposit had not reached
the bank at the statement date.
3) The bank returned a customer’s NSF cheque for $225 received
as payment of an account receivable.
4) The bank statement showed $30 interest earned on the bank
balance for the month of July.
5) Cheque 781 for supplies cleared the bank for $268 but was
erroneously recorded in our books as $240.
6) A $486 deposit by Acme Company was erroneously credited to
our account by the bank.
Bank Reconciliation
Bank Reconciliation
Ending bank balance, July 31
Additions:
Deposit in transit
Deductions:
Bank error
$
Outstanding cheques
Correct cash balance
Ending book balance, July 31
Additions:
Interest
Deductions:
Recording error
$
NSF cheque
Correct cash balance
$
9,610
500
486
2,417
$
2,903
7,207
$
7,430
30
28
225
$
253
7,207
Bank Reconciliation
GENERAL JOURNAL
Date
Description
Jul 31 Cash (A)
Post.
Ref.
Page 56
Debit
30
Interest Revenue (R)
31 Supplies Inventory (A)
Accounts Receivable (A)
Cash (A)
Credit
30
28
225
253