Fraud is a deliberate misrepresentation of facts that is done for the purpose of persuading another party to act in a way that is detrimental to the party concerned.
The two most common types of fraud are:
- Misuse of assets. This type
of fraud is perpetrated by employees of the entity who steal money from
the company and cover it up through erroneous entries on the books.
- Incorrect financial
reporting. This type of fraud is perpetrated by company managers who make
incorrect and misleading entries in the books. Which makes the company's
financial results appear better than they really are.
Fraud and Ethics
The decision to engage in fraud is an action that has economic, legal,
and ethical implications. Fraudsters usually do so for their own short-term
economic gain, while others suffer economic losses that may far outweigh the
gains for fraudsters. In addition, fraud is also defined as illegal by state,
federal, and international law as illegal. From an ethical standpoint, fraud
violates the rights of the many for the good of the few, and in the end,
everyone suffers a loss.
Internal control
Internal control is an organizational plan and procedural system
implemented by company management and the board of directors, and is designed
to fulfill five objectives, namely:
- maintain assets,
- encourage employees to
follow company policies,
- promote operational
efficiency,
- ensure accurate and reliable
accounting records,
- obey the law.
Internal Control Structure
The company's internal control structure consists of policies and
procedures implemented to provide assurance that the company's goals and
objectives will be achieved. The elements are:
- Control environment
Factors that affect the control environment of a company include
operating philosophy and style, organizational structure, the functioning of
the board of commissioners, management control methods, personnel policies and
procedures, and control awareness.
- Accounting System.
The accounting system in a company is intended to identify, summarize,
classify, analyze, record, and report company transactions, as well as hold
accountability for assets and debts as well as company capital.
Principles of Internal Control
- Formation of responsibility
Control is most effective when only one person is responsible for a
particular company. If only one person carries out a company task, then it is
easy to find out who is responsible for the shortfall.
- Physical, mechanical, and
electronic control
Physical control is closely related to asset protection. Mechanical and
electronic controls also protect assets, partly enhancing the accuracy and
correctness of accounting records.
- Separation of duties
There are two common applications of this principle:
- Related activities should be
assigned to different people.
- Creation of accountability (by recording) for assets that should be separate from the physical custody of these assets.
The principle of independent internal verification involves the objective comparison and reconciliation of data made by other employees. Independent internal verification is especially useful in reporting comparisons of existing assets to ensure accountability.
- Documentation procedures
Documents provide evidence that transactions and events have occurred.
It also indicates that the goods have been shipped, and the sales invoice shows
that the customer has been billed for the goods.
Internal Control Limitations
A company's internal control system is generally designed to provide
reasonable assurance that assets are properly safeguarded and accounting
records are reliable. The concept of logical assurance is based on the premise
that the cost of carrying out internal control procedures should not exceed
expectations.
Internal Control over Cash Receipts
Incoming cash comes from various sources; cash sales; receipt of bill
payments from customers; interest receipts; rent, and dividends; investment by
owners; bank loans; and the proceeds from the sale of non-current assets.
- Over-the-counter reception
Control of over-the-counter receipts in a retail business is centralized
at the cash register, which is visible to the customer. This method prevents
the cashier from taking the smaller amount and stealing the difference. The
customer receives cash, which is recorded on the cash receipt machine, and is
expected to calculate the amount of change. This machine accumulates daily
transactions and totals them.
- Mail Receipt
These receipts are generally in the form of checks or letters of
withdrawal. Sometimes it is also equipped with a remittance advice that states
the purpose of the check. Each check is marked "For Deposit Only"
with a company stamp. This usage company lowers the possibility of checks being
converted for personal use. The list of checks received each day should be made
in duplicate. This list shows the name of the check issuer, the purpose of
payment and the amount of the check
Internal Control over Cash Disbursements
- Voucher System
A voucher system is a network of approvals by independent authorized
individuals to ensure that all disbursements by check are correct. Vouchers are
usually created by the accounts payable department. The voucher system involves
two journal entries, one to issue the voucher and one to pay for the voucher.
- Electronic funds transfer
system
Electronic funds transfer is a payment system that uses cable, telephone, or computer to transfer cash from one location to another. Example: most Employees do not receive formal pay checks from their employers, instead receiving electronic deposit information to certain banks.
- Petty cash fund
A petty cash fund is a cash fund that is used to pay relatively small
amounts of expenses while maintaining satisfactory control. The operation of a
petty cash fund, which is often referred to as an imprest system, includes
three stages: establishing the fund, making payments from the fund, and
replenishing the fund.
- Making bank deposits
The deposit slip is made in duplicate. The original slip for the bank,
or a copy of it, is stamped by the bank as authentic proof, for depositors.
- Issuing Checks
a check is a written document signed by the depositor ordering the bank
to pay a certain amount of money to a designated party. There are three parties
associated with a check: (1) the maker, (2) the bank or payer, (3) the
recipient or drawer. Checks must be accompanied by an explanation of the
purpose of payment.
- Bank Reports
Bank statements show the depositor's banking transactions and balances.
The bank statement shows (1) checks paid and other debits that reduce the
depositor's account balance; (2) deposits and other credits that add to the
depositor's account balance; and (3) the balance after daily transactions.
- Bank Account Reconciliation
Bank account reconciliation is the process of adjusting the cash balance
reported on a company's books with the cash balance on the bank statement.
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