AC 224 (chapter 7) Flashcards
What is fraud?
A dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.
What is the purpose of the Sarbanes-Oxley Act (SOX)?
Aimed at protecting investors from corporate fraud.
What are the requirements for companies under SOX?
- Maintain internal controls
- Submit to oversight of internal controls by the board of directors and auditors
- Submit to an independent audit
What is the Public Company Accounting Oversight Board (PCAOB)?
Created to oversee the independent auditors.
What is internal control?
A process designed to provide reasonable assurance regarding the achievement of company objectives related to operations, reporting, and compliance.
What are the purposes of internal controls?
- Safeguard assets
- Enhance the reliability of accounting records
- Increase efficiency of operations
- Ensure compliance with laws and regulations
What framework should companies follow for internal controls?
The Committee on Sponsoring Organization’s (COSO) Integrated Framework.
What are the components of a company’s internal control systems according to COSO?
- Control environment
- Risk assessment
- Control activities
- Information and communication
- Monitoring
What is the principle of establishment of responsibility in internal control?
Control is most effective when only one person is responsible for a given task.
What does segregation of duties entail?
Different individuals should be responsible for related activities to provide a reliable basis for evaluating work.
What should companies use for documentation procedures?
Prenumbered documents, and all documents should be accounted for.
What are physical controls in internal control?
Controls that protect physical assets from theft or damage.
What is independent internal verification?
Records verified periodically or on a surprise basis by an independent employee.
What are human resource controls?
- Bond employees who handle cash
- Rotate employees’ duties and require vacations
- Conduct background checks
What is the role of data analytics in internal control?
Continuous monitoring of transactions to quickly identify and investigate irregularities.
What are the limitations of internal control?
- Costs should not exceed benefits
- Human element
- Size of the business
Why are cash controls particularly important?
Cash is readily convertible into other assets and is easily transportable and concealable.
What are the cash receipts controls for over-the-counter receipts?
- Control of cash registers
- All sales must be entered into the register through POS software
- Cash counted at the end of the shift and verified by a supervisor
What is electronic funds transfer (EFT)?
Uses wire, telephone, or computers to transfer funds from one location to another.
How are checks received at the time of sale handled?
Included in the cash register and reconciled with daily sales.
What is the cash disbursement control method preferred by companies?
Paying by check or electronic funds transfer (EFT) rather than by cash.
What is a voucher system in cash disbursement controls?
A network of approvals by authorized individuals to ensure all disbursements are proper.
What is a petty cash fund?
Used to pay small amounts and involves establishing, making payments from, and replenishing the fund.
