When signed by the person whose signature is on the signature card, the check authorizes the bank to transfer the face amount of the check from the payer's account to the payee. Usually, the ending balance reported on the bank statement differs from the balance in the depositor's cash account on the same date. The adjustments necessary to determine the amount of cash actually held by the depositor at the date of the bank statement are then added to and subtracted from the unadjusted bank balance.
A bank account is reconciled when the actual cash balance is determined from an unadjusted perspective. The depositor adds the amount of cash collections to the unreconciled accounting balance in the process of determining the true cash balance. The investor adds the amount of interest income to the unreconciled accounting balance in the process of determining the true cash balance.
Banks deduct such fees and penalties directly from the depositor's account and inform the depositor of the deduction through a debit note included on the bank statement. The depositor subtracts the amounts of NSF checks from the unadjusted book balance in the process of determining the true cash balance.
Illustrating a Bank Reconciliation
Certified checks are therefore deducted by the bank in determining the unadjusted bank balance, regardless of whether they have been cleared with the bank or are still outstanding as of the date of the bank statement. Because certified checks are immediately deducted from both bank and deposit records, they do not cause discrepancies between the depositor's and bank's balances.
GREEN SHADES RESORTS, INC
The bank charged GSRI an $8.40 service fee
GSRI deposited a $289.51 check from a customer who did not have sufficient funds to cover the check. Because the true balance determined from the perspective of the bank statement matches the true balance determined from the perspective of GSRI's books, the bank statement was successfully reconciled with the accounting records. Each of the adjustments to the book balance must be recorded in GSRI's financial records.
Since cash payments are overstated by this amount, they must be added back to GSRI's cash balance and deducted from the utility expense account, increasing net income. Because there is not enough money in the customer's bank account to pay the check, GSRI did not actually receive cash, so GSRI must reduce its cash account. Meanwhile, it will show the amount of the NSF check as an account receivable.
As this chapter explains, segregation of duties is one of the key features of a good system of internal controls. However, segregation of duties is not designed to detect fraud at the top management level. Even with a good system of internal controls, a level of trust is always required in the business.
His investors trusted him and accepted that they could rely on his independent auditor to spot any major problems with the way BMI was investing, or not investing, their money. Federal prosecutors believe that BMI's auditor, David Friehling, did very little to properly audit BMI's books. In fact, on March 18, 2009, he was also arrested and charged with falsely certifying BMI's financial statements.
IMPORTANCE OF ETHICS
Common Features of Criminal and Ethical Misconduct
CHECK YOURSELF 4.2
The three elements are often arranged in the shape of a triangle as shown in Figure 4.5. Opportunity is shown at the top of the triangle because without opportunity fraud could not exist. The most effective way to reduce opportunities for ethical or criminal misconduct is to implement an effective set of internal controls.
In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgment in all their activities. Members should accept an obligation to act in a manner that serves the public interest, respects the public trust and demonstrates a commitment to professionalism. To maintain and extend public trust, members should perform all professional responsibilities with the highest sense of integrity.
A member must observe the technical and ethical standards of the profession, constantly strive to improve competence and quality of service, and perform professional responsibility to the best of his or her ability. A member in public practice must follow the principles of the Code of Professional Conduct when determining the scope and nature of the services to be provided. Internal control policies and procedures that have been generally adopted are discussed in the next section.
Only a few employees choose the dark side, even when internal controls are weak and opportunities abound. The second element of the fraud triangle recognizes pressure as a key ingredient of misconduct. A manager who is told "make the numbers or you'll be fired" is more likely to cheat than someone who is told "tell it like it is." Pressure can come from different sources.
To help you prepare for the real-world situations you're likely to encounter, we include ethical dilemmas in the end-of-chapter material.
ROLE OF THE INDEPENDENT AUDITOR
For example, banks use elaborate vaults to protect cash and vaults, but universities have little use for this type of equipment. If you commit a white-collar crime, you usually lose the opportunity to hold a white-collar job. Accept both legal and professional responsibilities to the public as well as the company paying the auditor.
Presents conclusions in an audit report that includes an opinion on whether the statements are prepared in accordance with GAAP.
The Financial Statement Audit
Materiality and Financial Audits
Accounting majors take at least one and often two or more courses in auditing to understand how to conduct an audit. An explanation of audit techniques is beyond the scope of this course, but keep in mind that auditors do not review how the company accounts for each transaction.
Types of Audit Opinions
Confidentiality
In relation to the discovery of significant fraud, the auditor is expected to inform management at least one level above the position of the employee involved in the fraud and to inform the board of the company. Where possible, the functions of authorisation, recording and custody should be exercised by different individuals. Furthermore, procedures must be established to ensure that employees receive appropriate training to maintain their competence.
Employees in sensitive positions should be covered by a loyalty bond, which provides insurance to cover losses due to illegal acts committed by employees. Employees should be required to take extended absences from the workplace so that they are not always present to cover up unscrupulous or illegal activities. To promote compliance, the procedures for processing transactions should be clearly described in the manual.
To motivate employees and promote effective control, clear lines of authority and responsibility must be established. Prenumbered forms should be used for all important documents such as purchase orders, receiving reports, invoices and checks. Because few people can objectively evaluate their own performance, independent performance evaluations must be performed.
Because cash is such an important business asset and because it is tempting to steal, much of the discussion of internal controls in this chapter focused on cash controls. One of the most common checking policies is to use checking accounts for all payments except petty cash. A bank reconciliation should be prepared each month to explain differences between the bank statement and a company's internal accounts.
Matching the two actual cash balances provides evidence that the accounting for cash transactions has been accurate.
A Look Forward >>
The bank statement included the following items
Finally, the chapter discussed the auditor's role in financial reporting, including the concept of materiality and the types of audit opinions that can be issued.
The unadjusted book balance at July 31 was $1,400
A comparison of the bank statement with company accounting records disclosed the following
TERRY’S PEST CONTROL COMPANY
- Book Balance Added or
- Determining the true cash balance, starting with the unadjusted book balance
- CHECK FIGURE
- CHECK FIGURE
- Business Application Case Understanding real-world annual reports Use the Target Corporation’s annual report in Appendix B to answer the following questions
- Group Assignment Bank reconciliations
- Research Assignment Investigating Cash and Management Issues at Smucker’s
- Writing Assignment Internal control procedures
- Ethical Dilemma I need just a little extra money
According to the statement, the service fees were $30 and the bank cashed a $450 note owed to Crumbley. It was discovered that a check to pay for baseball cards was correctly written and paid by the bank for $4,040, but was recorded on the books as $4,400. A $100 debit note was included in the statement for the purchase of a new supply of checks.
Yang recorded $500 in receipts on January 31, which were deposited in the bank's night depository. A check for $31 was returned by the bank for insufficient funds and was reflected on the bank statement. In reviewing the bank reconciliation, Surf's accountant could not find any reference to the NSF check on the bank statement.
In addition, the clerk who reconciles the bank account and records the adjusting entries could not find the actual NSF check that should have appeared on the bank statement. What is the total amount of cash missing, and what was the difference between the “real cash” according to the bank and the “real cash” according to the hidden books on the reconciliation prepared by the former employee. Instead of "Cash," the company's balance sheet uses the account name "Cash and Cash Equivalents."
Discuss the cause of the difference between the unadjusted cash balance and the ending balance for the bank statement. Also discuss types of adjustments commonly made to the bank balance and types of adjustments commonly made to the unadjusted book balance. Instead of "Cash," the company's balance sheet uses the account name "Cash and Cash Equivalents." How does the company define cash equivalents.
She would never take a day off because she might be needed at the bank. When Adam and Jammie reviewed some of the bank's internal control procedures, they discovered problems. Prepare a written letter to the bank president outlining the procedures to be followed to prevent such problems in the future.
