These lectures cover principles of internal control, fraud triangle, fraud, petty cash Fund, cash disbursements Controls and cash receipts Controls.
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 the following.
- •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 Wells Fargo Bank over a two-year period.
- •A church treasurer “borrowed” $150,000 of church funds to finance a friend’s business dealings.
Internal control is a process designed to provide reasonable assurance regarding the achievement of company objectives related to operations, reporting, and compliance. In more detail, the purposes of internal control are to safeguard assets, enhance the reliability of accounting records, increase efficiency of operations, and ensure compliance with laws and regulations. Internal control systems have five primary components as listed below.
- •A control environment. It is the responsibility of top management to make it clear that the organization values integrity and that unethical activity will not be tolerated. This component is often referred to as the “tone at the top.”
- •Risk assessment. Companies must identify and analyze the various factors that create risk for the business and must determine how to manage these risks.
- •Control activities. To reduce the occurrence of fraud, management must design policies and procedures to address the specific risks faced by the company.
- •Information and communication. The internal control system must capture and communicate all pertinent information both down and up the organization, as well as communicate information to appropriate external parties.
- •Monitoring. Internal control systems must be monitored periodically for their adequacy. Significant deficiencies need to be reported to top management and/or the board of directors.
Principles of Internal Control ActivitiesEach of the five components of an internal control system is important. Here, we will focus on one component, the control activities. The reason? These activities are the backbone of the company’s efforts to address the risks it faces, such as fraud. The specific control activities used by a company will vary, depending on management’s assessment of the risks faced. This assessment is heavily influenced by the size and nature of the company.
The six principles of control activities are as follows.
- •Establishment of responsibility
- •Segregation of duties
- •Documentation procedures
- •Physical controls
- •Independent internal verification
- •Human resource controls
We explain these principles in the following sections. You should recognize that they apply to most companies and are relevant to both manual and computerized accounting systems.
Cash is the one asset that is readily convertible into any other type of asset. It also is easily concealed and transported, and is highly desired. Because of these characteristics, cash is the asset most susceptible to fraudulent activities. In addition, because of the large volume of cash transactions, numerous errors may occur in executing and recording them. To safeguard cash and to ensure the accuracy of the accounting records for cash, effective internal control over cash is critical.