Chapter 4 - Cash and Internal Controls Flashcards
What can cause incorrect financial statements?
Errors and fraud
Errors
What can cause incorrect financial statements?
Accidental errors in recording transactions or applying accounting rules
Fraud
What can cause incorrect financial statements?
Intentional deception for personal gain or to damage another person
Occupational fraud
The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employer’s resources
Types of fraud
Embezzlement of cash
Theft of assets
Filing false insurance claims
Financial statement fraud
What are the three parts of the fraud triangle?
Pressure
Rationalization
Opportunity
Pressure
Fraud triangle
Fraud is mostly committed by people under financial pressure, and often associated with pressure to meet or beat expectations
Rationalization
Fraud triangle
Attempt to justify actions to overcome feelings of guilt
Opportunity
Fraud triangle
Perception that there is a chance to get away with it.
Internal controls
Safeguard a company’s assets
Improve the accuracy and reliability of accounting information
Sarbanes-Oxley Act of 2002
Applies to all companies that are required to file financial statements with the SEC
Established guidelines related to:
Internal control procedures
Auditor-client relationship
Five internal control components
- Control environment
- Risk assessment
- Control activities
- Monitoring activities
- Information and communication
Control environment
The overall attitudes and actions of management
Risk assessment
Careful consideration of internal and external risk factors
Control activities
Include a variety of policies and procedures used to protect a company’s assets
Monitoring activities
Monitoring of internal controls needs to occur on an ongoing basis
Information and communication
Depend on the reliability of the accounting information system itself
What are the two general types of control activities?
Preventative and detective controls
Separation of duties
What type of control activity is it?
A set of procedures intended to separate employees’ duties for authorizing transactions, recording transactions, and controlling the related assets
Preventative control
Physical controls
What type of control activity is it?
A set of procedures that ensure assets and accounting records are kept safe
Preventative control
Proper authorization
What type of control activity is it?
A set of procedures designed to prevent improper use of the company’s resources
Preventative control
Employee management
What type of control activity is it?
Providing employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties
Preventative control
E-commerce controls
What type of control activity is it?
A set of procedures specifically designed to ensure only authorized personnel are able to conduct e-commerce transactions
Preventative control
Reconciliations
What type of control activity is it?
Management should periodically determine whether the amount of physical assets of the company agree with the accounting records
Detective control
Performance reviews
What type of control activity is it?
The actual performance of individuals or processes should be checked against their expected performance
Detective control
Audits
What type of control activity is it?
Hire an independent auditor to assess the internal control procedures to detect any deficiencies or fraudulent behavior of employees
Detective control
Collusion
Two or more people acting in coordination to circumvent internal controls
Cash equivalents
Liquid investments with maturity of 90 days or less.
Ex: U.S. Treasury bills, and money market accounts
Bank reconciliation
Matching the balance of cash in the bank account with the balance of cash in the company’s own records
Deposits outstanding
Cash receipts of the company that have not been added to the bank’s record of the company’s balance
NSF check
A check received and deposited by a company that is later determined by the bank to have nonsufficient funds. Also known as a “bad” check from a customer
