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BBA 2201, Principles of Accounting I 1 Cou rse Learning Outcomes for Unit VI Upon completion of this unit, students should be able to: 6. Explain internal accounting controls. 6.1 Identify the weaknesses in internal control. 6.2 Apply internal control principles to cash. Course/Unit Learning Outcomes Learning Activity 6.1 , 6.2 Unit Lesson Chapter 8, pp. 8 -1 to 8 -28 Unit VI Case Study Required Unit Resources Chapter 8: Fraud, Internal Control, and Cash, pp. 8 -1 to 8-28 Unit Lesson Fraud, Internal Control, and Cash Safeguarding the assets of a company is extremely important to its long -term success. The policies and procedures that companies put in place to safeguard and secure their assets are referred to as internal controls ( W eygandt, Kimmel, & Kieso, 2018). These internal controls are vitally important to the managers, the employees, the creditors, and the investors of the company. The m anagers must hav e proper controls in place to ensure that the assets owned by the company are properly accounted for, guarded, and secure. The employees need to be assured that managem ent is doing all they can to provide a stable workforce by safeguarding the assets of th e company. The creditors and the investors want to lend and invest in companies that take the safeguarding of their assets very seriously. The need for internal controls is so important that the U.S. Congress passed a law requiring publicly held companie s to maintain a system of internal controls (W eygandt et al., 2018). In 2002, Congress passed the Sarbanes -Oxley Act (SOX), which brought about increased corporate governance and increased personal liability on the corporate officers responsible for the ov ersight of the company’s accounting and financial reporting. Only publicly held companies must comply with the SOX regulatory requirem ents. However, this legislation has forced managers of privately held companies to take internal controls more seriously. W hen President George W . Bush signed SOX into law on July 30, 2002, the bill was designed to protect investors by improving guidelines for accurate and reliable corporate disclosures and oversight for financial reporting.
The legislation impacted all organ izations, regardless of size. The act introduced some long -overdue changes to the regulation of financial practice and corporate governance (Addison -Hewitt Associates, 2006). UNIT VI STUDY GUIDE Fraud, Internal Control, and Cash BBA 2201, Principles of Accounting I 2 UNIT x STUDY GUIDE Title Three main factors contribute to fraud within the organization. These three fa ctors include opportunity, financial pressure, and rationalization.
W orkplaces with insufficient controls in place to detect and deter fraud provide employees with opportunities to take advantage ( i.e. , if the opportunity presents itself without detriment, employees looking for an opportunity will take it ). Financial pressures also contribute to fraud. If an employee is experiencing financial struggles or issues at home, and if the opportunity is there, the employee is then more tempted to defraud the organ ization. Finally, rationalization completes the fraud triangle. Rationalization is simply the justification for committing fraud . F or example, the employee may justify his or her actions because he or she feel s underpaid or the amount seems so minimal that it will not be missed. The asset most susceptible to theft or fraud is cash. The reason for this is that it is hard to trace cash transactions. W ithout proper controls in place, it would be very hard for a company to minimize its exposure to fraud or thef t to its cash transactions. Consider the scenario below. A Certified Public Accountant (CPA) relayed how one of his clients was the victim of fraud by his office manager. The office manager was responsible for all aspects of the accounting process. The manager received payments from customers over the counter and by mail. The manager posted the payments to the customers ’ accounts and completed the daily bank deposit. The manager was also responsible for recording the deposits in the company’s checking ac count . To make matters worse, the manager also reconciled the company’s bank accounts at the end of the month. The office manager began taking the customers’ receipts and depositing them into her private checking account. The manager would post the recei pts to the customers ’ account so the customers ’ balance owed to the company would be correct. The office manager was very careful and made sure this was only done a few times per week. The weekly theft committed by the office manager averaged $850, but ove r 3 years, the total theft was more than $125,000! The fraud was discovered because the office manager became very sick and was hospitalized for 2 weeks. The owner had his wife take over the duties of the office manager. As she began to reconcile the bank for the previous month, she discovered that the number of receipts that were posted to the customers’ accounts did not equal the deposits in the checking account. The wife became suspicious and realized that this had happened in the previous month as well . The owner called his CPA, and it was discovered that the office manager was able to do this over a 3 -year period. How could this fraud have been prevented? This fraud could have been prevented by an internal control policy referred to as a separation o f duties. Separation of duties is the practice of dividing accounting responsibilities between two or more people in order to limit fraud and promote accuracy of accounting records (W eygandt et al., 2018). BBA 2201, Principles of Accounting I 3 UNIT x STUDY GUIDE Title For example, som eone other than the office manager should have received all customer paym ents (including all checks received through the mail). Another person should have prepared a cash journal (a log of the cash receipts) and prepared the bank deposit. The office manager should have credited the customers ’ accounts and recorded the cash receipt s to the cash account. The owner (or someone other than the office m anager) should have carried the deposit to the bank. As you can see from the aforementioned scenario , a small theft carried out consistently over a period of time can be very costly to a company. It is very important that managers and employees take the internal controls of the business very seriously. Reference s Addison -Hewitt Associates. (n.d.). Sa rbanes -Oxley Act 2002. http://www.soxlaw.com/index.htm W eygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Accounting principles (13th ed.) [VitalSource Bookshelf version]. https://online.vitalsource.com/#/books/978119411017 Suggested Unit Resources In order to access the following resources, click the links below. A transcript and closed captioning are available once you access the video s. The following video will discuss the basics of the internal control s as they apply to accounting and will focus on the internal control system, the integrated fram ework for internal controls, and risk assessm ent. BBA 2201, Principles of Accounting I 4 UNIT x STUDY GUIDE Title Course Hero. (2019, April 5). Internal control basics | Principles of accounting [Video] . https://c24.page/ypfae3zp76w7d2b898np4v756w The video below discusses the Sa rbanes -Oxley Act of 2002 (SOX) and the m ain effe cts on companies, executives, and audit firms. Edspira. (2017, August 20). The Sarbanes Oxley Act of 2002 [Video]. https://c24.page/vwmg5w88472t93rxx29bvd6ep7 Th e following video discusses internal controls and bank reconciliation, using the example of personal banking reconciliation. Routh, B. (TheAccountingDr ). (2015, November 4). Internal controls & cash: Bank reconciliation [Video] . https://c24.page/nac4hgvn4unt5h6qrqsxgcwa4n Learning Activities (Nong raded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact y our instructor for further guidance and information. This is an opportunity for you to express your thoughts about the material you are studying by writing about it.
Conceptual thinking is a great way to study because it gives you a chance to process what you have learned , and it increases your ability to rem ember it. In order to practice what you have learned, please attempt the exercises below, which can be found in your textbook. DO IT! 1 | Control Activities, p . 8-11 DO IT! 2a | Control over Cash Receipts, p . 8-14 DO IT! 2b | Petty Cash Fund, p. 8-19 DO IT! 3 | Bank Reconciliation, p . 8-26 DO IT! 4 | Reporting Cash, p . 8-28 You are also encouraged to complete the following end -of-chapter exercises and problems, which can be found in your textbook . Practice Multiple Choice Questions and Solutions, p p. 8-29 to 8 -31 Practice Brief Exercises, p p. 8-31 to 8 -33 Practice Problem, p p. 8-33 to 8 -34 If you have any questions or do not understand a concept, contact your professor for clarification. Complet ing these practice exercises and problems will give you practice, which will be helpful as you complete the assignment for this unit.