Chapter 5 Flashcards
Fraud
Dishonest act by employee that results in personal benefit at a cost to the employer
3 factors that contribute to fraud
Opportunity, financial pressure, rationalization
4 properties of the Sarbanes-Oxley Act (SOX)
- applies to publicly traded U.S corporations
- Required to maintain a system of internal control
- Corporate executives and boards of directions must ensure controls are reliable and effective
- Independent outside auditors must attest to adequacy of internal control system
Methods and measures of internal control are adopted to…
- safeguard assets
- enhance accuracy and reliability of accounting records
- increase efficiency of operations
- ensure compliance with laws and regulations
5 components of internal control
- control environment
- risk assessment
- control activities
- information and communication
- monitoring
Establishment of responsibility
Limiting access only to authorized personnel and identifying those people
Segregation of duties
Different people are responsible for related activities
Responsibility for record-keeping should be separate from the physical custody
Documentation procedures
Companies should use prenumbered documents and all should be accounted for
Physical controls
Vaults, time clocks, alarms, etc.
Independent internal verification
Records periodically verified by an employee who is independent (its like an added step from segregation of duties)
Human resource controls
Rotate employee’s duties and require vacations, conduct background checks, bond employees who handle cash
Limitations of internal control
Costs should not exceed benefit
Human element
Size of business
Cash over/short
When there is a difference between the actual cash and the amount reported on the cash register tape
Applications of cash disbursement controls
Voucher system controls and petty cash fund
Voucher system
An authorization form prepared for each expenditure
