Chapter 3 Part 1 (Ethics, Fraud and Internal Control) Flashcards

1
Q

pertains to the principles of conduct that individuals use in making choices and guiding their behavior in situations that involve the concept of right and wrong

A

ethics

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2
Q

the most significant securities law since the SEC act of 1933 and 1934, comprised of many sections

A

Sarbanes -Oxley

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3
Q

section 406 in the Sarbanes Oxley sates that Codes of Ethics should address what items?

A
  • conflict of interest
  • full and fair disclosure
  • legal compliance
  • internal reporting of code violations
  • accountability
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4
Q

outlines procedures for dealing with the actual or apparent conflict between personal and professional relationships. Does not prohibit; but rather talks about how to handle them if they do arise.

A

conflict of interest

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5
Q

organization must provide full, fair, accurate, timely and understandable disclosures in the documents, reports and financial statements.
overly complex or misleading information is not right; must be open, trustful, void of deception

A

full & fair disclosure

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6
Q

must follow all governmental laws, rules and regulations

cannot confuse ethics with legal issues

A

legal compliance

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7
Q

provide a way for people to report violations

A

internal reporting of code violations

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8
Q

action for violations of the code

A

accountability

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9
Q

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 hoer detriment

A

fraud

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10
Q

What are the 5 conditions of fraud according to the common law?

A
  • false representation: must be a false statement or a non-disclosure
  • material fact: must be a substantial factor in inducing someone to act
  • intent: must be the intent to deceive or the knowledge that one’s statement is false
  • justifiable reliance: misrepresentation must have been a substantial factor on which the injured party relied
  • injury or loss: the deception must have caused injury or loss to the victim of fraud
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11
Q

intentional deception or misappropriation of a company’s assets, or manipulation of a company’s financial data to the advantage of the perpetrator

A

fraud and business

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12
Q
  • done by non-management employee
  • most often to convert cash or other company assets into employee’s benefit
  • employee has circumvented the internal control system for personal gain
  • stealing something
  • converting that to cash
  • concealing the act
A

employee fraud

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13
Q
  • does not usually involve a direct theft of assets

- drive market price up to help meet a stock target that then drives compensations

A

management fraud

  • at a level of management where internal controls do not relate
  • involves using the financial statements to create an illusion that an entity is healthier than is
  • involves misappropriation of assets and hidden in a maze of complex transactions
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14
Q

an individual with high moral ethics who is confronted wit lower-level of opportunity and pressure will be more honest than someone with weaker ethics who are confronted with greater pressure and opportunity

A

the fraud triangle

  • if pressure and opportunity is larger then ethics is going to be weaker and vise versa
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15
Q

stresses, motivation, or incentive to commit fruad

A

pressure

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16
Q

ability to carry out misappropriation of cash or organizational assets

A

opportunity

17
Q

one’s character and moral opposition to act dishonest or one’s ability to rationalize the event

A

ethics

18
Q

ACFE deals with what type of fraud?

A

occupational fraud

three categories:

  • asset misappropriation scheme
  • corruption schemes
  • financial statements fraud schemes
19
Q

an employee steals or misuses the organization’s resources (e.g., theft of company cash, false billing scheme or inflate expense reports)

  • stealing small supplies as in highlighters, keying in extra time, and creating fictitious vendors
A

asset misappropriation scheme

20
Q

an employee misuses his or her influences in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit (e.g., schemes involving bribery or conflicts of interest)

A

corruption scheme

21
Q

an employee intentionally causes a misstatement or omission of material information in organization’s financial reports (e.g., recording fictitious revenues, understating reported expenses or artificially inflating reported assets)

A

financial statement fraud scheme

22
Q

auditing firms also engaged by tier clients to perform non-accounting activities

A

lack of auditor independence

23
Q

directors who also serve on the boards of other companies, have a business trading relationship, have a financial relationship as stockholders or have received personal loans, or have an operational relationship as employees

A

lack of director independence

24
Q

short-term stock options as compensation result in short-term strategies aimed at driving up stock prices at the expense of the firm’s long-term health

A

questionable executive compensation scheme

25
Q

a characteristic common to many financial statement fraud schemes

A

inappropriate accounting practices

26
Q

sets auditing, quality control and ethics standards for auditing public companies is a way to review auditors of public companies which investigates and takes disciplinary action on auditor

A

public company accounting oversight board (PCAOB) created by SOX

27
Q

audit committee members must be independent and the audit committee must oversee the external auditors

A

corporate governance and responsibility

28
Q

A process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance.

A

internal control - COSO definition

29
Q

cannot provide 100% absolute assurance

A

reasonable assurance

30
Q
  • Possibility of honest errors
  • Circumvention via collusion
  • Management override
  • Changing conditions–especially - in companies with high growth
A

limitations of internal controls

31
Q

CEO and CFO must certify quarterly/annually the internal controls of the organization

A

section 302 of the SOX

32
Q

management must “assess” and issue an opinion on the internal controls of a company:

  • management’s responsibility for establishing and maintaining adequate controls over financial reporting
  • assessment of the controls
  • the external auditors must review
  • must disclose the framework used
A

section 404 of the SOX