Chapter – 8: Fraud, Internal

Control & Cash

Overview

Control Features

Bank Reconciliation

Adjusting Entries
 Fraud, Internal Control, and Cash

Control
Fraud and
Cash Controls Features: Use of Reporting Cash
Internal Control
a Bank

Fraud Cash receipts Making deposits Cash equivalents

The Sarbanes- controls Writing checks Restricted cash
Oxley Act Cash Bank statements Compensating
Internal control disbursements balances
Reconciling the
controls
Principles of bank account
internal control Electronic funds
Limitations transfer (EFT)
system
Control Features: Use of Banks
 Contributes to good internal control over
cash
◦ Minimizes the amount of currency on hand
◦ Creates a double record of bank transactions
◦ Bank reconciliation
 Some payments are so small that
companies pay them from a different cash
account called petty cash
Control Features: Use of Banks
 Deposit can be done through:
◦ Cash: In cash counter of bank
◦ Check: In clearing section of bank
 Requires a deposit slip
Control Features: Use of Banks
 Medium to large amount of payments can
be done through writing checks.
Control Features: Use of Banks
 A bank statement shows the account holder’s
bank transactions and balances for a certain
period of time.
◦ Transactions that increase bank balance are recorded
in the credit side
◦ Transactions that decrease bank balance are recorded
in the debit side
 Bank service charges are recorded in the
statement and also a debit memorandum is
attached with it
 Notes Receivables collection and Interest earned
are recorded in the statement and a credit
memorandum is attached with it
Bank Reconciliation
Bank Reconcilliation
 Reconcile balance per books and balance
per bank to their adjusted (corrected)
cash balances.
 Reconciling Items:
1.Deposits in transit.

2.Outstanding checks.

3.Errors.

4.Bank memoranda.
 Bank Reconciliation
Reconciliation Procedures

+ Notes collected by
bank
+ Deposit in Transit - NSF (bounced) checks
- Outstanding - Check printing or
Checks other service charges
+- Bank Errors +- Company Errors
CORRECT BALANCE CORRECT BALANCE
 Bank Reconciliation
Example: The bank statement for Laird Company shows a balance per bank
of $15,907.45 on April 30, 2010. On this date the balance of cash per books
is $11,589.45. Using the four reconciliation steps, Laird determines the
following reconciling items.
 Bank Reconciliation
Example: a) Prepare a bank reconciliation at April 30.

Cash balance per bank statement $15,907.45

Add: Deposit in transit 2,201.40
Less: Outstanding checks (5,904.00)
Adjusted cash balance per bank $12,204.85

Cash balance per books $11,589.45

Add: Error in recording check no. 443 36.00
Collection of notes + interest - fee 1,035.00
Less: NSF check (425.60)
Bank service charge (30.00)
Adjusted cash balance per books $12,204.85
 Adjusting Entries
The company records each reconciling item used to
determine the adjusted cash balance per books.
Collection of Note Receivable: Assuming interest of $50
has not been accrued and collection fee is charged to
Miscellaneous Expense, the entry is:

Apr. 30 Cash 1,035.00

Miscellaneous expense 15.00
Notes receivable 1,000.00
Interest revenue 50.00
 Adjusting Entries
Book Error: The cash disbursements journal shows that
check no. 443 was a payment on account to Andrea Company,
a supplier. The correcting entry is:

Apr. 30 Cash 36.00

Accounts payable 36.00
 Adjusting Entries
NSF Check: As indicated earlier, an NSF check becomes
an account receivable to the depositor. The entry is:

Apr. 30 Accounts receivable 425.60

Cash 425.60

Bank Service Charges: Depositors debit check printing

charges (DM) and other bank service charges (SC) to
Miscellaneous Expense. The entry is:

Apr. 30 Miscellaneous 30.00

Cash 30.00