Chapter 3 Flashcards
Ethics are needed when
conflicts arise—the people need to choose
In business, conflicts may arise between:
employees
management
stakeholders
Litigation
Four main areas of business ethics
- Equity
- Rights
- Honesty
- Exercise of Corporate Power
concerns the social impact of computer technology (hardware, software, and telecommunications).
Computer ethics
What are the main computer ethics issues?
Privacy
Security—accuracy and confidentiality
Ownership of property
Environmental issues
Artificial intelligence
Unemployment and displacement
Misuse of computer
false statement or disclosure
False representation
a fact must be substantial in
inducing someone to act
Material fact
Legal Definition of fraud
- False representation
- Material Fact
- Intent to deceive must exist
- Justifiable reliance on misrepresentation
- Caused injury or loss
Enron, WorldCom, Adelphia
Underlying Problems
- Lack of Auditor Independence
- Lack of Director Independence
- Questionable Executive Compensation Schemes
- Inappropriate Accounting Practices
Sarbanes-Oxley Act of 2002 principal reforms pertain to
Creation of the Public Company Accounting Oversight Board (PCAOB)
Auditor independence—more separation between a firm’s attestation and non-auditing activities
Corporate governance and responsibility—audit committee members must be independent and the audit committee must oversee the external auditors
Disclosure requirements—increase issuer and management disclosure
New federal crimes for the destruction of or tampering with documents, securities fraud, and
actions against whistleblower
Committed by non-management personnel/employee
Usually consists of: an employee taking cash or other
assets for personal gain by circumventing a company’s
system of internal controls
Employee Fraud
Perpetrated at levels of management above the
one to which internal control structure relates
Frequently involves using financial statements to
create an illusion that an entity is more healthy and prosperous than it actually is
Involves misappropriation of assets, it frequently is shrouded in a maze of complex business transaction
Management Fraud
Three categories of fraud schemes according to the
Association of Certified Fraud Examiners
A. fraudulent statements
B. corruption
C. asset misappropriation
Misstating the financial statements to make the copy
appear better than it is
Usually occurs as management fraud
May be tied to focus on short-term financial measures for success
May also be related to management bonus packages
being tied to financial statement
Fraudulent Statements
Examples of corruption
bribery
illegal gratuities
conflicts of interest
economic extortion
indicative of corruption in business world
impacted accounting by requiring accurate
records and internal controls
Foreign Corrupt Practice Act of 1977
Most common type of fraud and often occurs as
employee fraud
Examples:
making charges to expense accounts to cover theft of
asset (especially cash)
lapping: using customer’s check from one account to cover theft from a different account
transaction fraud: deleting, altering, or adding false transactions to steal assets
Asset Misappropriation
Internal Control Objectives
According to AICPA SAS
- Safeguard assets of the firm
- Ensure accuracy and reliability of accounting records and information
- Promote efficiency of the firm’s operations
- Measure compliance with management’s prescribed policies and procedures
Modifying Assumptions to the Internal Control Objectives
- Management Responsibility
- Reasonable Assurance
- Methods of Data Processing
Limitations of Internal Controls
Possibility of honest errors
Circumvention via collusion
Management override
Changing conditions–especially in companies with high growth
Exposures of Weak Internal
Controls (Risk)
Destruction of an asset
Theft of an asset
Corruption of information
Disruption of the information system
Undesirable Events
- Access
- Fraud
- Errors
- Mischief
Levels of Control
- Preventive
- Detective
- Corrective
Five Internal Control
Components: SAS 78 / COSO
- Control environment
- Risk assessment
- Information and communication
- Monitoring
- Control activities
Integrity and ethics of management
Organizational structure
Role of the board of directors and the audit committee
Management’s policies and philosophy
Delegation of responsibility and authority
Performance evaluation measures
External influences—regulatory agencies
Policies and practices managing human resource
The control environment
Identify, analyze and manage risks relevant to financial reporting
Risk Assessment
The AIS should produce high quality information
which:
identifies and records all valid transactions
provides timely information in appropriate detail to
permit proper classification and financial reporting
accurately measures the financial value of transactions
accurately records transactions in the time period in which they occurred
Information and Communication
The process for assessing the quality of internal control
design and operation
Monitoring
Policies and procedures to ensure that the appropriate
actions are taken in response to identified risks
Control Activities
Control activities fall into two distinct categories
- IT Controls - relate specifically to the computer environment
- Physical Controls - primarily pertain to human activities
Two Types of IT Controls
- General Controls
- Application Controls
pertain to the entity wide
computer environment
General Controls
ensure the integrity of
specific systems
Application Controls
Six Types of Physical Controls
Transaction Authorization
Segregation of Duties
Supervision
Accounting Records
Access Control
Independent Verification
used to ensure that employees are carrying out only authorized transactions
general (everyday procedures) or specific(non routine transactions) authorization
Transaction Authorization
In manual systems, separation between:
● authorizing and processing a transaction
● custody and record keeping of the asset
● subtasks
In computerized systems, separation between:
● program coding
● program processing
● program maintenance
Segregation of Duties
a compensation for lack of segregation; some may
be built into computer systems
Supervision
provide an audit trail
Accounting Records
help to safeguard assets by restricting physical
access to them
Access Controls
reviewing batch totals or reconciling subsidiary
accounts with control accounts
Independent Verification
