CHAPTER 3 Flashcards
pertains to the principles of conduct that individuals use in making choices and guiding their behavior in situations that involve the concepts of right and wrong
Ethics
Four areas of ethical issues in business
equity, rights, honesty and the exercise of corporate power
The benefit from a decision must outweigh the risks. Furthermore, there must be no alternative decision that provides the same or greater benefit with less risk.
PROPORTIONALITY
The benefits of the decision should be distributed fairly to those who share the risks. Those who do not benefit should not carry the burden of risk
Justice
Even if judged acceptable by the principles, the decision should be implemented so as to minimize all of the risks and avoid any unnecessary risks.
Minimize risk
the analysis of the nature and social impact of computer technology and the corresponding formulation and justification of policies for the ethical use of such technology
Computer ethics
the most significant securities law since the Securities and Exchange Commission (SEC)
Sarbanes-Oxley Act (SOX)
denotes a false representation of a material fact made by one party to another party with the intent to deceive and induce the other party to justifiably rely on the fact to his or her detriment.
Fraud
generally designed to directly convert cash or other assets to the employee’s personal benefit.
Employee fraud, or fraud by nonmanagement employees
is more insidious than employee fraud because it often escapes detection until the
organization has suffered irreparable damage or loss
Management fraud
3 factors of fraud triangle
rationalization, opportunity, ethics
empowered to set auditing, quality control, and ethics standards; to inspect registered accounting firms; to conduct investigations; and to take disciplinary actions
Public Company Accounting Oversight Board
involves an executive, manager, or employee of the organization in collusion with an outsider
Corruption
involves giving, offering, soliciting, or receiving things of value to influence an official in the performance of his or her lawful duties.
Bribery
involves giving, receiving, offering, or soliciting something of value because of an official act that has been taken. This is similar to a bribe, but the transaction occurs after the fact
illegal gratuity
occurs when an employee acts on behalf of a third party during the discharge of his or her duties or has self-interest in the activity being performed.
conflict of interest
is the use (or threat) of force (including economic sanctions) by an individual or organization to obtain something of value.
Economic extortion
involves stealing cash from an organization before it is recorded on the organization’s books and records.
Skimming
an employee opening the mail steals a customer’s check and destroys the associated remittance advice.
mail room fraud
involves schemes in which cash receipts are stolen from an organization after they have
been recorded in the organization’s books and records.
Cash larceny
are perpetrated by employees who causes their employer to issue a payment to a false supplier or vendor by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases
Billing schemes, also known as vendor fraud
requires that the perpetrator establish a false supplier on the books of the victim company. The fraudster then manufactures false purchase orders, receiving reports, and invoices in the name of the vendor and submits them to the accounting system, which creates the allusion of a legitimate transaction
shell company fraud
is similar to the shell company fraud with the exception that a transaction actually takes place.
pass through fraud
is a third form of vendor fraud. This typically involves a clerk with check writing authority who pays a vendor twice for the same products (inventory or supplies) received.
pay-and-return scheme
involves forging or changing in some material way a check that the organization has written to a legitimate payee
Check tampering
is the distribution of fraudulent paychecks to existent and/or nonexistent employees
Payroll fraud
are schemes in which an employee makes a claim for reimbursement of fictitious or inflated business expenses.
Expense reimbursement frauds
are schemes that involve the direct theft of cash on hand in the organization
Thefts of cash
involve the theft or misuse of the victim organization’s non-cash assets.
Non-cash fraud schemes
This concept holds that the establishment and maintenance of a system of internal control is a
management responsibility
The internal control system should provide ______ that the four broad objectives of internal control are met in a cost-effective manner.
reasonable assurance
are passive techniques designed to reduce the frequency of occurrence of undesirable events.
Preventive controls
form the second line of defense. These are devices, techniques, and procedures designed to identify and expose undesirable events that elude preventive controls
Detective controls
are actions taken to reverse the effects of errors detected in the previous step.
Corrective controls
Five components of COSO framework
Control Environment
Risk Assessment
Information and Communication
Monitoring
Control Activities
is the foundation for the other four control components, sets the tone for the organization and influences the control awareness of its management and
employees.
control environment
Organizations must perform a ______ to identify, analyze, and manage risks relevant to financial reporting.
risk assessment
is the process by which the quality of internal control design and operation can be assessed.
Monitoring
are the policies and procedures used to ensure that appropriate actions are taken to deal
with the organization’s identified risks.
Control activities
pertain to entity-wide concerns such
as controls over the data center, organization databases, systems development, and program maintenance.
General controls
ensure the integrity of specific systems such as sales order processing, accounts payable, and payroll applications
Application controls
This class of controls relates primarily to the human activities employed in accounting systems.
PHYSICAL CONTROLS
ensure that all material transactions processed by the information system are valid and in accordance with management’s objectives.
transaction authorization
can take many forms, depending
on the specific duties to be controlled
Segregation of duties
consist of source documents, journals, and ledgers
accounting records
ensure that only authorized personnel have
access to the firm’s assets.
access controls
are independent checks of the accounting system to identify errors and misrepresentations.
Verification procedures
