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Internal control

bank reconciliation statement

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Learning Outcome

1. Define fraud and internal control.2. Identify the principles of internal control.3. Indicate the control features of a bank

account.4. Prepare a bank reconciliation.5. Explain the reporting of cash.

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Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.

Fraud and Internal ControlFraud

Why does fraud occur?

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Methods and measures adopted to:1. Safeguard assets. 2. Enhance accuracy and reliability of accounting

records. 3. Increase efficiency of operations, and 4. Ensure compliance with laws and regulations.

Fraud and Internal Control

Internal Control

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Measures vary withmanagement’s assessment of the risks faced.size and nature of the company.

Principles of Internal Control Activities

Fraud and Internal Control

Six principles of controls activities: Establishment of responsibility Segregation of duties Documentation procedures Physical controls Independent internal verification Human resource controls

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ESTABLISHMENT OF RESPONSIBILITYControl is most effective when only one person is responsible for a given task.

SEGREGATON OF DUTIESRelated duties, including physical custody and record keeping, should be assigned to different individuals.

DOCUMENTATION PROCEDURESCompanies should use prenumbered documents for all documents should be accounted for.

Fraud and Internal Control

Principles of Internal Control Activities

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PHYSICAL CONTROLS

Fraud and Internal Control

Principles of Internal Control Activities

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INDEPENDENT INTERNAL VERIFICATION

1. Verify records periodically or on a surprise basis.

2. Records verified by an employee who is independent.

3. Discrepancies reported to management.

Fraud and Internal Control

Principles of Internal Control Activities

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HUMAN RESOURCE CONTROLS1. Bond employees.2. Rotate employees’ duties

and require vacations.3. Conduct background

checks.

Fraud and Internal Control

Principles of Internal Control Activities

Costs of establishing control procedures should not exceed their expected benefits

The human element is an important factor in

every system of internal control. A good system can become ineffective through employee fatigue, carelessness, or indifference.

Collusion may result.• Two or more individuals work together to get

around prescribed controls and may significantly impair the effectiveness of a system.

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LIMITATIONS OF INTERNAL CONTROL

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Bank statement•It is document used by the bank to report the transaction of the depositor.

•It shows the bank account beginning and ending balance of a period conducted through the bank.

•It shows the cheque cleared (paid) by the bank and deposits received by the bank.

•The statement also includes other changes in the account.

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Bank Reconciliation•The balance in the business cash at bank

account rarely equals the balance shown on the bank statement.

•The difference arises because of time lag and errors made in the business records or by the bank.

•A bank reconciliation ensures that all cash transaction have been accounted for and that the bank and book records of cash are correct.

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Items recorded by the business These are item that has not been recorded

by the bank• Deposit in transit / Unrecorded

deposits / outstanding cheques• Unpresented cheques / outstanding

cheques• Errors made by the business

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Items recorded by the bankThese item are not shown in the business cash account•Bank collection•Electronic fund transfers•Service charges•Interest revenue on cheque or savings

account•Dishonoured cheques received from

customers•Errors made by the bank – accidental

deposits or accidental withdrawal.

Steps in preparing Bank reconciliation

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Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances. This is because the balances between them seldom has the same balance.

If the items are missing from bank statement – adjust bank side of reconciliationIf the items are missing from book balance-adjust book side of Reconciliation

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The following information pertains to Family Video Company.1. Cash balance per bank, July 31, $7,263.2. Cash balance per books, July 31, $7,284.3. July bank service charge not recorded by the depositor $28.4. Deposits in transit, July 31, $1,500.5. Bank collected $900 note for Family in July, plus interest

$36, less fee $20.The collection has not been recorded by Family, and no interest has been accrued.

6. Outstanding checks, July 31, $591.Instructionsa) Prepare a bank reconciliation at July 31.b) Journalize the adjusting entries at July 31 on the books of

Family Video Company.

Example

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a) Prepare a bank reconciliation at July 31.

Solutions

Cash balance per bank statement $7,263Add: Deposit in transit 1,500Less: Outstanding checks (591)Adjusted cash balance per bank $8,172Cash balance per books $7,284Add: Collection of notes receivable 900 Collection of interest 36Less: Bank service charge (28)

Note collection fee (20)Adjusted cash balance per books $8,172

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Cash 888July 31Bank charge expense 28Miscellaneous expense 20

Notes receivable

900Interest revenue

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Solution - Journalsb) Journalize the adjusting entries at July 31 on the books of Family Video Company.

Note: Adjusting journal entry includes only the adjustments to the cash balance per books.

Dr. Cr.