Survey of Accounting

Second Edition
Kimmel ● Weygandt

Chapter 5
Fraud, Internal Control,
and Cash
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
Chapter Outline
Learning Objectives
LO 1 Define fraud and the principles of internal
control.
LO 2 Apply internal control principles to cash.
LO 3 Identify the control features of a bank account.
LO 4 Explain the reporting of cash and the basic
principles of cash management.

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 Learning Objective 1
Define Fraud and the Principles of
Internal Control

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 Fraud and Internal Control
Fraud
Dishonest act by an employee that results in personal
benefit to the employee at a cost to the employer.
Three factors that
contribute to
fraudulent activity.

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 Internal Control
Methods and measures adopted to:
1. Safeguard assets.
2. Enhance accuracy and reliability of accounting
records.
3. Increase efficiency of operations.
4. Ensure compliance with laws and regulations.

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 Internal Control
Five Primary Components:
1. Control environment.
2. Risk assessment.
3. Control activities.
4. Information and communication.
5. Monitoring.

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 Principles of Internal Control Activities
Establishment of Responsibility
• Control is most effective when only
one person is responsible for a
given task.
• Establishing responsibility often
requires limiting access only to
authorized personnel, and then
identifying those personnel.

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 Principles of Internal Control Activities
Segregation of Duties
• Different individuals should be
responsible for related activities.
• Responsibility for record-keeping for
an asset should be separate from
physical custody of that asset.

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 Principles of Internal Control Activities
Documentation Procedures
• Companies should use
prenumbered documents,
and all documents should be
accounted for.
• Employees should promptly
forward source documents
for accounting entries to the
accounting department.

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 Principles of Internal Control Activities
Physical
Controls

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 Principles of Internal Control Activities
Independent Internal
Verification
• Records periodically
verified by an
employee who is
independent.
• Discrepancies
reported to
management.

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 Principles of Internal Control Activities
Human Resource Controls
• Bond employees who
handle cash.
• Rotate employees’ duties
and require vacations.
• Conduct background
checks.

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 Limitations of Internal Control
• Costs should not exceed benefit.
• Human element.
• Size of the business.

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 Learning Objective 2
Apply Internal Control Principles to
Cash

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 Cash Controls
Cash is readily convertible into any other type of asset.
• Easily concealed and transported.
• Asset most susceptible to fraudulent activities.
• Because of the large volume of cash transactions,
numerous errors may occur in executing and
recording them.
• Effective internal control over cash is critical.

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 Cash Receipt Controls

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 Cash Receipt Controls

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 Cash Receipt
Controls
Over-the-Counter
Receipts
Important internal
control principle—
segregation of
record-keeping from
physical custody.

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 Cash Disbursement Controls
Generally, internal control over cash disbursements is
more effective when companies pay by check or
electronic funds transfer (EFT) rather than by cash.
Applications:
• Voucher System Controls.
• Petty Cash Fund.

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 Cash Disbursement
Controls

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 Cash Disbursement Controls

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 Cash Disbursement Controls
Petty Cash Fund
Using checks to pay small amounts is both impractical and
a nuisance (postage due, working lunches, or taxi fares).
A way of handling such payments, while maintaining
satisfactory control, is to use a petty cash fund to pay
relatively small amounts.

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 Learning Objective 3
Identify the Control Features of a Bank
Account

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 Control Features of a Bank Account
Use of a bank contributes significantly to good internal
control over cash.
• Safeguards its cash by using a bank as a depository.
• Minimizes amount of currency on hand.
• Creates a double record of bank transactions.
• Bank reconciliation - process of comparing the bank's
balance with the company's balance.

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 Reconciling the Bank Account
Reconcile balance per books and balance per bank to
their “correct or true” balance.
Reconciling Items:
1. Time Lags.
• Deposits in transit.
• Outstanding checks.
• Bank memoranda.
2. Errors.

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 Reconciliation Procedures

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 Learning Objective 4
Explain the Reporting of Cash and the
Basic Principles of Cash Management

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 Reporting Cash
• Cash consists of coins, currency (paper money),
checks, money orders, and money on hand or on
deposit.
• Balance sheet reports amount of cash available at a
given point in time.
 Listed first in current assets section.
• Statement of cash flows shows sources and uses of
cash during a period of time.

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 Reporting Cash
Cash Equivalents
Cash equivalents are short-term, highly liquid
investments that are both:
1. Readily convertible to known amounts of cash, and
2. So near their maturity that their market value is
relatively insensitive to changes in interest rates.
Restricted Cash
Cash that is not available for general use.

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 Managing and Monitoring Cash
Basic Principles of Cash Management

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 Cash Budgeting
• Shows anticipated cash flows, usually over a one- to
two-year period.
 Cash receipts.
 Cash disbursements.
 Financing activities.
• Enables company to plan ahead to cover possible
cash shortfalls and to make investments of idle funds.
• Contributes to more effective cash management.

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