CH 4 Flashcards
Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Enron and Worldcom used questionable accounting practices to avoid reporting billions in debt and losses in financial statements and miss-classified certain expenditures to overstate assets and profitability by 11 billion.
i. Results in tricking investor’s stocks
1. Overvaluing stocks
b. When fraud uncovered, these companies stocks plummeted
c. Arthur Andersen, auditing company , was on longer a business .
What is occupational fraud
a. The use of one’s occupation or personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources.
b. Expected loss of 7%
What is internal control?
a. Company’s safeguards
i. Protects the company’s assets
ii. Improve the accuracy and reliability of accounting information
What is ACFE?
a. Association of certified fraud examiners
b. Anti-fraud organization
c. 90% of company resources involved theft and misuse.
Who are stewards of a company?
5) “Mangers of companies act as stewards or caretakers of the company’s assets.”
What are the major provisions of the Sarbanes oxley act 2002.
a. Oversight board
i. the authority to establish standards dealing with auditing, quality control, ethics, independence, and other activities relating to the preparation of audited financial reports.
b. Corporate executive accountability
i. Executives must present financial statements
c. Non-audit services
i. It’s unlawful for the auditors to perform certain non-auditing services.
d. Retention of work papers
i. Auditors must retain records all paper work for seven years
e. Auditor rotation
i. Must have auditors rotate every five years.
f. Conflicts of interest
i. Executives aren’t allowed to hire auditing companies where executives use to work.
g. Hiring of auditor
i. Auditors are hired by auditing ACFE
h. Internal control
i. Section 404 of the act requires
1. Company management document and assess the effectiveness of all internal control processes that could affect financial reporting
2. Company auditors express an opinion of whether management’s assessment of the effectiveness of internal control is fairly stated.
What is PCAOB?
Public company accounting oversight board
ii. Nonprofit corporation established by congress to oversee the audits of public companies in order to protect the interests of investors and further the public interest in preparation of informative, accurate and independent audit reports.
Identify the components, responsibilities, and limitations of internal control.
Components ( information analysis and communication through each level)
i. Designed by COSO (committee of sponsoring organization)
1. Monitoring ( report control deficiencies)
2. Control activities (identify and control management directives)
a. Separation of duties
b. Physical controls
c. Proper authorization
d. Employee management
3. Risk assessment( internal and external risk factors)
4. Control environment ( ethical tone)
b. Responsibilities
i. Safeguard company’s assets
ii. Improve accuracy and reliability of acct
c. Limitations
i. Collusion ( two or more people act in coordination)
ii. Top level have ability to override internal control features
d. If management or the auditor notes any deficiencies in internal controls, financial accounting information may be unreliable.
What is cash?
a. Currency, coins, balances in savings, checking accounts, and items acceptable for deposit( checks).
What does cash do for a company?
a. To pay obligations
b. To respond quickly to new and profitable opportunities
c. Too much leads to inefficient use of funds( investors see too much cash as a negative sign)
how do you control cash receipts?
a. Cash receipts
i. Record all cash receipts as soon as possible. More difficult for thievery.
ii. Open mail each day and make a list of checks received
iii. Designate an employee to deposit cash and checks into the company’s bank account each day, not an employee who receives receipts.
iv. Have another employee record cash receipts in the accounting records. Verify cash receipts by comparing the bank deposit slip
v. Accept credits cards or debit cards to limit employees’ handling of cash
how do credit cards earn revenue?
- The cardholder is subjected to interest fees
2. Credit card companies charge ranges from 2% to 4%
What are the benefits of using debit cards?
i. Offers customers a way to purchase goods and services without physical exchange of cash.
ii. Like credit cards, debit card services are charged to retailer, but much lower.
What is cash disbursements?
cash payments without record
How do you properly control cash disbursements?
i. Make all disbursements by check, debit, or credit card
ii. Authorize all expenditures before purchase and verify the accuracy of the purchase itself.
iii. Make sure checks are serially numbered and signed only by authorized employees
iv. Periodically check amounts shown in the debit card and credit card statements against purchase receipts.
v. Set maximum purchase limits on debit cards and credit cards.
vi. Employees responsible for making cash disbursements should not also be in charge of cash receipts.
