Preview of Chapter 7 As the story about recording cash sales at Stephanie's Gourmet Coffee and More indicates, control of cash is important to ensure that fraud does not occur. Companies also need controls to safeguard other types of assets. For example, Stephanie's undoubtedly has controls to prevent the theft of food and supplies, and controls to prevent the theft of tableware and dishes from its kitchen In this chapter, we explain the essential features of an internal control system and how it prevents fraud. We also describe how those controls apply to a specific asset—cash. The applications include some controls with which you may be already familiar, such as the use of a bank. The content and organization of Chapter 7 are as follows Fraud, Internal Control, and Cash arr Control ery on Control Features: Cee ere Reporting Cash Froud + Overthe-counter + Voucher system * Making deposits * Cash equivalents + Internal control receipts controls * Writing checks + Restricted cash * Principles of internal * Mail receipts + Petty cash fund + Bank statements + Compensating control activities controls * Reconciling the balances + Limitations bank account + Electronic funds transfer (EFT) system FRAUD AND INTERNAL CONTRO! FED ESATITSAILTIEME The Feature Story describes many of the internal control procedures used Define fraud and internal control, bY Stephanie’s Gourmet Coffee and More. These procedures are neces- sary to discourage employees from fraudulent activities. Fraud A fraud is a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. Examples of fraud reported in the financial press include: * A bookkeeper in a small company diverted $750,000 of bill payments to a per- sonal bank account over a three-year period. * A shipping clerk with 28 years of service shipped $125,000 of merchandise to himself. * A computer operator embezzled $21 million from Wells Fargo Bank (USA) over a two-year period. * A church treasurer “borrowed” $150,000 of church funds to finance a friend’s business dealings. Why does fraud occur? The three main factors that contribute to fraudulent activity are depicted by the fraud triangle in Illustration 7-1 ‘The most important element of the fraud triangle is opportunity, For an em- ployee to commit fraud, the workplace environment must provide opportunities 298