CHAPTER 8 – CASH, FRAUD, AND company where responsibility is not established,

determining who is at fault is difficult. For instance, if

INTERNAL CONTROL
two salesclerks share the same cash register and cash is
Internal Control System missing, neither clerk can be held accountable. To
prevent this problem, a company can use separate cash
drawers for each clerk.

Internal Control:
Maintain Adequate Records

Managers (or owners) of small businesses often control

the entire operation. They know whether the business is
actually receiving the assets and services paid for. Most
companies cannot maintain personal supervision and
must rely on internal controls.

Maintain Adequate Records:

Principles of Internal Control Good recordkeeping helps protect assets and helps
managers monitor company activities. When there are
detailed records of equipment, for instance, items are
unlikely to be lost or stolen without detection. Similarly,
transactions are less likely to be entered in wrong
accounts if a chart of accounts is used. Preprinted forms
are also part of good internal control. When sales slips
are properly designed, employees can record information
efficiently with fewer errors. When sales slips are
prenumbered, each slip is the responsibility of one
salesperson, preventing the salesperson from stealing
cash by making a sale and destroying the sales slip.
Computerized point-of-sale systems achieve the same
control results.

Internal Control: Internal Control: Insure Assets and Bond Key

Employees
Establish Responsibilities

Insure Assets and Bond Key Employees:

Establish Responsibilities:
Assets should be insured against losses, and employees
Responsibility for a task should be clearly established
handling lots of cash and easily transferable as sets
and assigned to one person. When a problem occurs in a
should be bonded. An employee is bonded when a Internal Control: Apply Technological
company purchases an insurance policy, or a bond,
Controls
against theft by that employee. Bonding discourages
theft because bonded employees know the bonding
company will pursue reported theft.

Internal Control: Separate Recordkeeping from

Custody of Assets

Perform Regular and Independent Reviews:

Regular reviews of internal controls help ensure that
procedures are followed. These reviews are preferably
done by auditors not directly involved in the activities.
Auditors evaluate the efficiency and effectiveness of
internal controls. Many companies pay for audits by
Separate Recordkeeping from Custody of Assets: independent auditors. These auditors test the company’s
financial records and evaluate the effectiveness of
A person who controls or has access to an asset must not internal controls
have access to that asset’s accounting records. This
principle reduces the risk of theft or waste of an asset
because the person with control over it knows that Control of Cash
another person keeps its records. Also, a recordkeeper
who does not have access to the asset has no reason to
falsify records. This means that to steal an asset and hide
the theft from the records, two or more people must
collude —or agree in secret to commit the fraud.

Internal Control: Divide Responsibility for Related

Transactions
Control of Cash Payments Voucher System of Control (continued)

A voucher system’s control over cash payments begins

Control of cash payments is important as most large when a company incurs an obligation that will result in
thefts occur from payment of fictitious invoices. One key payment of cash. A key factor in this system is that only
to controlling cash payments is to require all payments to authorized departments and individuals to incur such
be made by check. The only exception is small payments obligations. The system often limits the type of
made from petty cash. Another key is to deny access to obligations that a department or individual can incur. In
the accounting records to anyone other than the owner a large retail store, for instance, only a purchasing
who has the authority to sign checks. A small-business department should be authorized to incur obligations for
owner often signs checks and knows from personal merchandise inventory. Another key factor is that
contact that the items being paid for are actually procedures for purchasing, receiving, and paying for
received. This arrangement is impossible in large merchandise are divided among several departments (or
businesses. Instead, internal control procedures must be individuals). These departments include the one
substituted for personal contact. Such procedures are requesting the purchase, the purchasing department, the
designed to assure the check signer that the obligations receiving department, and the accounting department. To
recorded are properly incurred and should be paid. coordinate and control responsibilities of these
departments, a company uses several different business
Cash Budgets are Projected cash receipts and cash documents. This slide shows how documents are
payments are summarized in a cash budget. If there is accumulated in a voucher, which is an internal document
enough cash for operations, companies wish to minimize (or file) used to accumulate information to control cash
the cash they hold because of its risk of theft and its low disbursements and to ensure that a transaction is
return versus other assets. properly recorded.

Check
Voucher System of Control
A voucher system is a set of procedures and approvals
designed to control cash payments and the acceptance of
cash payments for liabilities
To withdraw money, the depositor can use a check, Bank Reconciliation
which is a document telling the bank to pay a specified
amount to a designated recipient. A check involves three A bank reconciliation is prepared periodically to explain
parties: a maker who signs the check, a payee who is the the difference between cash reported on the bank
recipient, and a bank (or payer) on which the check is statement and the cash balance on company’s books.
drawn. The bank provides the depositor the checks.
Exhibit 8.5 shows one type of check. It has an optional
remittance advice explaining the payment. The memo
line is used for an explanation.
Electronic funds transfer (EFT) is the electronic transfer
of cash from one party to another. Companies are Bank Reconciliation Demonstration:
increasingly using EFT because of its convenience and Steps 1-4
low cost. Payroll, rent, utilities, insurance, and interest
payments usually done by EFT. The bank statement lists
cash withdrawals by EFT with the checks and other
deductions. Cash receipts by EFT are listed with deposits
and other additions.

Bank Statement

In preparing the bank reconciliation, it is helpful to refer

to Exhibit 8.7 and steps 1 through 9.
1. Enter the bank statement balance of the Cash account
(balance per bank). VideoBuster’s bank balance is
$2,050.
2. Add any unrecorded deposits and bank errors that
understate the bank balance. VideoBuster’s $145 deposit
placed in the bank’s night depository on October 31 is
not recorded on its bank statement.
3. Subtract any outstanding checks and bank errors that
Usually once a month, the bank sends a bank statement overstate the bank balance. VideoBuster’s comparison of
showing the account activity. Different banks use canceled checks with its books shows two checks
different formats for their bank statements, but all of outstanding: No. 124 for $150 and No. 126 for $200.
them include the following:
4. Compute the adjusted bank balance
1. Beginning-of-period account balance.
2. Checks and other debits decreasing the
account during the period. Documentation and Verification

3. Deposits and other credits increasing the  Purchase Requisition

account during the period.  Purchase Order
 Invoice
4. End-of-period account balance.  Receiving Report

This appendix describes the important business

documents of a voucher system of control.
Department managers are usually not allowed to place no step is omitted, it often uses an invoice
orders directly with suppliers for control purposes.
approval, also called check authorization.
Instead, a department manager must inform the
purchasing department of its needs by preparing and
signing a purchase requisition, which lists the
merchandise needed and requests that it be purchased. Voucher
A purchase order is a document the purchasing
department uses to place an order with a vendor (seller
or supplier).
An invoice is an itemized statement of goods prepared
by the vendor listing the customer’s name, items sold,
sales prices, and terms of sale. An invoice is also a bill
sent to the buyer from the supplier. From the vendor’s
point of view, it is a sales invoice.
Many companies maintain a separate department to
receive all merchandise and purchased assets. When
each shipment arrives, this receiving department counts Once an invoice has been checked and approved, the
the goods and checks them for damage and agreement voucher is complete. A complete voucher is a record
with the purchase order. It then prepares four or more summarizing a transaction. Once the voucher certifies a
copies of a receiving report, which is used within the transaction, it authorizes recording an obligation. A
company to notify the appropriate persons that ordered voucher also contains approval for paying the obligation
goods have been received and to describe the quantities
on an appropriate date.
and condition of the goods.

Invoice Approval

The accounting department should have

copies of the following documents in the
voucher: purchase requisition, purchase
order, and invoice. With the information in
these documents, the accounting department
can record the purchase and approve its
payment. In approving an invoice for
payment, it checks and compares
information across all documents. To
facilitate this checking and to ensure that