Deswita Triana Ceisilia
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Dasar-dasar Akuntansi
Resume Chapter 7: Fraud, Internal Control, and Cash
Fraud and Internal Control
Fraud
A fraud is a dishonest act by an employee that results in personal benefit to the employee at a
cost to the employer. Examples of fraud reported in the financial press include:
- A bookkeeper in a small company diverted $750,000 of bill payments to a personal bank
account over a three-year period.
- A shipping clerk with 28 years of service shipped $125,000 of merchandise to himself.
- A computer operator embezzled $21 million from a major bank over a two-year period.
- A church treasurer “borrowed” $150,000 of church funds to finance a friend’s business
dealings.
Three main factors to fraud that contribute to fraudulent activity, such as:
1. Opportunity
2. Financial pressure
3. Rationalization
Internal Control
Consist of all the related methods and measures adopted within an organization to safeguard its
assets, enhance the reliability of its accounting records, increase efficiency of operations, and
ensure compliance with laws and regulations. Internal control systems have five primary
components as listed below:
1. A control environment
2. Risk assessment
3. Control activities
4. Information and communication
5. Monitoring
Principles of internal Control Activities
There are six principles of internal control activities are:
1. Establishment of responsibility: Control is most effective when only one person is
responsible for a given task.
2. Segregation of duties: Have two common applications, such as: 1) different individuals
should be responsible for related activities and 2) the responsibility for record-keeping for
an asset should be separate from the physical custody of that asset.
3. Documentation procedures: Companies should establish procedures for documents. First,
whenever possible, companies should use prenumbered documents, and all documents
should be accounted for. Prenumbering helps to prevent a transaction from being
recorded more than once, or conversely, from not being recorded at all. Second, the
control system should require that employees promptly forward source documents for
accounting entries to the accounting department. This control measure helps to ensure
timely recording of the transaction and contributes directly to the accuracy and reliability
of the accounting records.
4. Physical controls: Physical controls relate to the safeguarding of assets and enhance the
accuracy and reliability of the accounting records.
5. Independent internal verification: Most internal control systems provide for independent
internal verification. This principle involves the review of data prepared by employees.
To obtain maximum benefit from independent internal verification:
- Companies should verify records periodically or on a surprise basis.
- An employee who is independent of the personnel responsible for the information
should make the verification.
- Discrepancies and exceptions should be reported to a management level that can
take appropriate corrective action.
6. Human resource controls: human resources controls activities are:
- Bond employees who handle cash. Bonding involves obtaining insurance
protection against theft by employees.
- Rotate employees’ duties and require employees to take vacations. These
measures deter employees from attempting thefts since they will not be able to
permanently conceal their improper actions.
- Conduct thorough background checks. Many believe that the most important
and inexpensive measure any business can take to reduce employee theft and
fraud is for the human resources department to conduct thorough background
check.
Limitations of Internal Control
Companies generally design their systems of internal control to provide reasonable assurance
(this concept rests on the premise that the costs of establishing control procedures should not
exceed their expected benefit) of proper safeguarding of assets and reliability of the accounting
records.
The human element is an important factor in every system of internal control. A good system can
become ineffective as a result of employee fatigue, carelessness, or indifference.
Cash Controls
Cash Receipts Controls
Application of internal control principles to cash receipts:
- Establishment of Responsibility, only designated personnel are authorized to
handle cash receipts (cashier).
- Segregation of Duties, different individuals receive cash, record cash, and hold
the cash.
- Documentation Procedures, user remittance advice (mail receipts), cash register
tapes, and deposit slips.
- Physical Controls, store cash in safes and bank vaults; limit access to storage
areas; use cash registers.
- Independent Internal Verification, supervisors count cash receipts daily;
treasurer compares total receipts to bank deposits daily.
- Human Resources Controls, bond personnel who handle cash; require
employees to take vacations; conduct background checks.
Over-the-Counter Receipts
In retail businesses, control of over-the-counter receipts centers on cash registers that are visible
to customers. A cash sale is rung up on a cash register, with the amount clearly visible to the
customer. This activity prevents the cashier from ringing up a lower amount and pocketing the
difference. The customer receives an itemized cash register receipt slip and is expected to count
the change received. The cash register’s tape is locked in the register until a supervisor removes
it. This tape accumulates the daily transactions and totals.
Flowchart:
Mail Receipts
All mail receipts should be opened in the presence of at least two mail clerks. These receipts are
generally in the form of checks. A mail clerk should endorse each check “For Deposit Only.”
The mail clerks prepare, in triplicate, a list of the checks received each day. This list shows the
name of the check issuer, the purpose of the payment, and the amount of the check.
Cash Disbursement Controls
Generally, internal control over cash disbursements is more effective when companies pay by
check rather than by cash. One exception is for incidental amounts that are paid out of petty cash.
Voucher System Controls
A voucher system is a network of approvals by authorized individuals, acting independently, to
ensure that all disbursements by check are proper. The system begins with the authorization to
incur a cost or expense. It ends with the issuance of a check for the liability incurred. A voucher
is an authorization form prepared for each expenditure. Companies require vouchers for all types
of cash disbursements except those from petty cash.
Petty Cash Fund Controls
A common way of handling such payments, while maintaining satisfactory control, is to use a
petty cash fund to pay relatively small amounts. The operation of a petty cash fund, often called
an impress system, involves:
1. Establishing the petty cash fund: Two essential steps in establishing a petty cash fund are:
(1) appointing a petty cash custodian who will be responsible for the fund, and (2)
determining the size of the fund. Ordinarily, a company expects the amount in the fund to
cover anticipated disbursements for a three-to four-week period.
2. Making payments from the petty cash fund: The petty cash custodian has the authority to
make payments from the fund that conform to prescribed management policies. Usually,
management limits the size of expenditures that come from petty cash. Likewise, it may
not permit use of the fund for certain types of transactions (such as making short-term
loans to employees).
3. Replenishing the petty cash fund: When the money in the petty cash fund reaches a
minimum level, the company replenishes the fund. The petty cash custodian initiates a
request for reimbursement. The individual prepares a schedule (or summary) of the
payments that have been made and sends the schedule, supported by petty cash receipts
and other documentation, to the treasurer’s office. The treasurer’s office examines the
receipts and supporting documents to verify that proper payments from the fund were
made. The treasurer then approves the request and issues a check to restore the fund to its
established amount. At the same time, all supporting documentation is stamped “paid” so
that it cannot be submitted again for payment.
Control Features: Use of a Bank
The use of a bank contributes significantly to good internal control over cash. A company can
safeguard its cash by using a bank as a depository and as a clearing house for checks received
and written. Use of a bank minimizes the amount of currency that a company must keep on hand.
Also, use of a bank facilitates the control of cash because it creates a double record of all bank
transactions—one by the company and the other by the bank. The asset account Cash maintained
by the company should have the same balance as the bank’s liability account for that company.
A bank reconciliation compares the bank’s balance with the company’s balance and explains any
differences to make them agree.
Making Bank Deposit
An authorized employee, such as the head cashier, should make a company’s bank deposits.
Deposit slips are prepared in duplicate. The bank retains the original; the depositor keeps the
duplicate, machine-stamped by the bank to establish its authenticity.
Writing Checks
A check is a written order signed by the depositor directing the bank to pay a specified sum of
money to a designated recipient. There are three parties to a check: (1) the maker (or drawer)
who issues the check, (2) the bank (or payer) on which the check is drawn, and (3) the payee to
whom the check is payable. A check is a negotiable instrument that one party can transfer to
another party by endorsement.
Bank Statement
A bank statement shows the depositor’s bank transactions and balances. Each month, a depositor
receives a statement from the bank. It shows (1) checks paid and other debits that reduce the
balance in the depositor’s account, (2) deposits and other credits that increase the balance in the
account, and (3) the account balance after each day’s transactions.
Debit Memorandum
Some banks charge a monthly fee for their services. Often, they charge this fee only when the
average monthly balance in a checking account falls below a specified amount. They identify the
fee, called a bank service charge, on the bank statement by a symbol such as SC. The bank also
sends with the statement a debit memorandum explaining the charge noted on the statement.
Other debit memoranda may also be issued for other bank services such as the cost of printing
checks, issuing traveler’s checks, and wiring funds to other locations. The symbol DM is often
used for such charges. Banks also use a debit memorandum when a deposited check from a
customer “bounce” because of insufficient funds.
Credit Memorandum
Sometimes a depositor asks the bank to collect its notes receivable. In such a case, the bank will
credit the depositor’s account for the cash proceeds of the note. This is illustrated by the symbol
CM on the Laird Company bank statement. The bank issues and sends with the statement a credit
memorandum to explain the entry. Many banks also offer interest on checking accounts. The
interest earned may be indicated on the bank statement by the symbol CM or INT.
Reconciling the Bank Account
The bank and the depositor maintain independent records of the depositor’s checking account.
People tend to assume that the respective balances will always agree. In fact, the two balances
are seldom the same at any given time, and both balances differ from the “correct” or “true”
balance. Therefore, it is necessary to make the balance per books and the balance per bank agree
with the correct or true amount—a process called reconciling the bank account. The need for
agreement has two causes:
1. Time lags that prevent one of the parties from recording the transaction in the same
period as the other party.
2. Errors by either party in recording transactions.
Time lags occur frequently.
Reconciliation Procedure
1. Deposits in transit: Deposits recorded by the depositor that have not been recorded by the
bank
2. Outstanding checks: Issued checks recorded by the company but that have not yet been
paid by the bank.
3. Errors
4. Bank Memoranda
Electronic Funds Transfer System
It is not surprising that companies and banks have developed approaches to transfer funds among
parties without the use of paper (deposit tickets, checks, etc.). Such procedures, called electronic
funds transfers (EFT), are disbursement systems that use wire, telephone, or computers to
transfer cash balances from one location to another. Use of EFT is quite common.
Reporting Cash
Cash consists of coins, currency (paper money), checks, money orders, and money on hand or on
deposit in a bank or similar depository. Companies report cash in two different statements: the
statement of financial position and the statement of cash flows.
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
A company may have restricted cash, cash that is not available for general use but rather is
restricted for a special purpose.
