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:

  1. 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.
  2. 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:

  1. maintain assets,
  2. encourage employees to follow company policies,
  3. promote operational efficiency,
  4. ensure accurate and reliable accounting records,
  5. 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:

  1. 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.

  1. 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

  1. 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.

  1. 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.

  1. Separation of duties

There are two common applications of this principle:

  1. Related activities should be assigned to different people.
  2. Creation of accountability (by recording) for assets that should be separate from the physical custody of these assets.
    4. Independent internal verification

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.

  1. 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.

  1. 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.

  1. 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

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.