Chapter 5
Fraud, Internal Control, and Cash
PowerPoint Author:
Brandy Mackintosh, CA
Copyright © 2016 by McGraw-Hill Education
Learning Objective 5-1
Define fraud and internal
control.
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Fraud
Fraud is generally defined as an attempt to
deceive others for personal gain.
Corruption
Asset
Misappropriation
Financial
Statement Fraud
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Fraud
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The Sarbanes-Oxley Act (SOX)
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Internal Control Objectives
Internal control consists of the actions taken by
people at every level of an organization to
achieve its objectives.
Operations
5-6
Reporting
Compliance
Internal Control Components
Most organizations use the following control
components as a framework when analyzing
their internal control systems.
Control
Environment
Risk
Assessment
Information and
Communication
s
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Control
Activities
Monitoring
Activities
Relationship of Control Objectives
and Components
5-8
Learning Objective 5-2
Explain common principles
and limitations of internal
control.
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Principles of Control Activities
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Control Limitations
Internal controls can never completely prevent
and detect errors and fraud for two reasons:
Benefits must
exceed the
costs
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Human error
or
fraud
Learning Objective 5-3
Apply internal control
principles to cash receipts and
payments.
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Internal Control for Cash
Internal controls for cash are important because
the volume of cash transactions is enormous and
because cash is valuable and portable and
therefore poses a high risk of theft.
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Controls for Cash Receipts
Business can receive cash in
two different ways:
Receive cash
in person at
time of sale
Receive cash
through
electronic
transfer
The primary internal control goal for cash
receipts is to ensure that the business
receives the appropriate amount of cash
and safely deposits it in the bank.
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Cash Received in Person
5-15
Cash Received in Person
Cashiers rung up sales totaling $6,100 but had
only $6,097 to deposit.
1 Analyze
Assets
Cash
2
=
+$6,097
+
Stockholders’ Equity
Sales
Revenue (+R) +$6,100
Cash Shortage (+E) -$3
Record
Cash
Cash Shortage
Sales Revenue
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Liabilities
6,097
3
6,100
Cash Received from a Remote
Source
5-17
Cash Received from a Remote
Source
5-18
Controls for Cash Payments
Most cash payments involve writing a check or
completing an electronic funds transfer (EFT).
In rare cases where a company pays for
purchases with dollar bills and coins, it uses a
petty cash system.
The primary goal of internal controls for all
cash payments is to ensure that the
business pays only for properly authorized
transactions.
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Cash Paid by Check for Purchases
on Account
5-20
Cash Paid by Check for Purchases
on Account
5-21
Cash Paid by Check for Purchases
on Account
5-22
Cash Paid by Check for Purchases
on Account
5-23
Cash Paid by Check for Purchases
on Account
5-24
Cash Paid by Check for Purchases
on Account
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Cash Paid to Employees via
Electronic Funds Transfer
Most companies pay cash to their employees
through EFTs, which are known by
employees as direct deposits.
To reduce the risk of the bank accidentally
overpaying or underpaying an employee,
many companies use an imprest system.
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Cash Paid to Reimburse
Employees (Petty Cash)
A petty cash system is used to reimburse
employees for small expenditures they have
made on behalf of the organization.
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Controls from Bank Procedures
Banks provide important services that help
businesses to control cash in several ways:
Restricting
Access
Documenting
Procedures
Independently
Verifying
A bank reconciliation is an internal report
prepared to verify the accuracy of both the
bank statement and the cash accounts of a
business or individual.
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Learning Objective 5-4
Perform the key control of
reconciling cash to bank
statements.
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Bank Statement
5-30
Bank Reconciliation
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Bank Reconciliation
To determine the appropriate cash
balance, these balances need to be
reconciled.
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Bank Reconciliation
Bank Reconciliation Goals
1.Identify the deposits in transit.
2.Identify the outstanding checks.
3.Record other transactions on the bank statement and
correct your errors.
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Bank Reconciliation
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Bank Reconciliation
After the reconciling entries are posted, the
Cash balance matches the bank
reconciliation ($11,478.40).
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Learning Objective 5-5
Explain the reporting of cash.
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Reporting Cash
(in millions)
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Supplement 5A
Petty Cash Systems
Copyright © 2016 by McGraw-Hill Education
Learning Objective 5-S1
Describe the operations of
petty cash systems.
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Petty Cash Systems
1. Put money
into the fund
2. Pay money
out of the fund
3. Replenish
the fund
1 Analyze
Assets
Cash
Petty Cash
2
Liabilities
+
Stockholders’ Equity
-$100
+$100
Record
Petty Cash
Cash
5-40
=
100
100
Petty Cash Systems
1. Put money
into the fund
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2. Pay money
out of the fund
3. Replenish
the fund
Petty Cash Systems
1. Put money
into the fund
2. Pay money
out of the fund
3. Replenish
the fund
1 Analyze
Assets
Cash
Supplies
2
- $67
+ $40
Liabilities
+
Stockholders’ Equity
Travel Expense (+E) -$21
Office Expense (+E) -$6
Record
Supplies
Travel Expense
Office Expense
Cash
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=
40
21
6
67
Chapter 5
Solved Exercises
M5-3, M5-8, M5-14, M5-16, E5-5,
E5-9
Copyright © 2016 by McGraw-Hill Education
M5-3 Identifying Internal Control Principles Applied by a
Merchandiser
Identify the internal control principle represented by each point in the
following diagram.
Establish Responsibility
Document Procedures
Independent Verify
Segregate Duties
Document Procedures
Restrict Access
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M5-8 Organizing Items on the Bank Reconciliation
Indicate whether the following items would be added (+) or subtracted
(-) from the company’s books or the bank statement side of a bank
reconciliation.
+
+
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M5-14 Reporting Cash and Cash Equivalents
Indicate (Yes or No) whether each of the following is properly included
in Cash and Cash Equivalents.
Yes
No
No
Yes
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M5-16 (Supplement 5A) Accounting for Petty Cash Transactions
On September 30, Hector’s petty cash fund of $100 is replenished. At
the time, the cash box contained $18 cash and receipts for taxi fares
($40), delivery charges ($12), and office supplies ($30). Prepare the
journal entry to record the replenishment of the fund.
Travel Expense ..................................................................................
Delivery Expense ...............................................................................
Supplies Expense ..............................................................................
Cash .............................................................................
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40
12
30
82
E5-5 Preparing a Bank Reconciliation and Journal Entries, and
Reporting Cash
Hills Company’s June 30 bank statement and the June ledger
account for cash are summarized here:
Required:
1. Prepare a bank reconciliation. A comparison of the checks written
with the checks that have cleared the bank shows outstanding
checks of $700. Some of the checks that cleared in June were
written prior to June. No deposits in transit were noted in May, but a
deposit is in transit at the end of June.
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E5-5 Preparing a Bank Reconciliation and Journal Entries, and
Reporting Cash
HILLS COMPANY
Bank Reconciliation
June 30
Bank Statement
Company’s Books
Ending balance per bank
statement………………..
Ending balance per Cash
account ………………..
$ 6,070
Additions:
Deposit in transit…………….
Additions:
*1,000
7,070
Deductions:
None
6,400
Deductions:
Outstanding checks………...
700
Bank service charge...……...
30
Up-to-date cash balance…...
$6,370
Up-to-date cash balance…...
$6,370
*$19,000 - $18,000 = $1,000.
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$ 6,400
E5-5 Preparing a Bank Reconciliation and Journal Entries, and
Reporting Cash
2. Give any journal entries that should be made as a result of the
bank reconciliation.
Office Expenses
Cash
To record bank service charges.
30
30
3. What is the balance in the Cash account after the reconciliation
entries?
$6,370 ($6,400 - $30)
4. In addition to the balance in its bank account, Hills Company
also has $300 of petty cash on hand. This amount is recorded in
a separate T-account called Petty Cash on Hand. What is the
total amount of cash that should be reported on the balance
sheet at June 30?
Balance sheet (June 30):
Current assets:
Cash ($6,370 + $300)
5-50
$6,670
E5-9 (Supplement 5A) Recording Petty Cash Transactions
Sunshine Health established a $100 petty cash fund on January 1.
From January 2 through 10, payments were made from the fund, as
listed below. On January 12, the fund had only $10 remaining;
a check was written to replenish the fund.
a. January 2- Paid cash for deliveries to customers - $23.
b. January 7- Paid cash for taxi fare incurred by office manager- $50.
c. January 10- Paid cash for pens and other office supplies - $17.
Required:
1. Prepare the journal entry, if any, required on January 1.
Petty Cash
Cash
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100
100
E5-9 (Supplement 5A) Recording Petty Cash Transactions
Required:
2. Prepare the journal entries, if any, required on January 2 through 10.
No journal entries are recorded when amounts are paid out of the petty cash
fund. These transactions are recorded only when the fund is replenished.
3. Prepare the journal entries, if any, required on January 12.
Delivery Expense
Travel Expense
Supplies
Cash
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23
50
17
90
End of Chapter 5
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