Chapter 7

Question 1

Internal Controls

Answer 1

refers to the safeguards the organization build within its own system of recording

Question 2

Five purposes of internal controls

Answer 2

-check handout

Question 3

Fraud Triangle

Answer 3

• opportunity
• financial pressure
• rationalization

Question 4

Control environment includes

Answer 4

-check handout

Question 5

fraud

Answer 5

is a dishonest act by an employee that results in personal benefits to the employee at a cost to the employer

Question 6

Opportunity

Answer 6

workplace lacks sufficient controls to deter and detect fraud

Question 7

Financial Pressure

Answer 7

personal financial problems caused by too much debt

Question 8

Rationalization

Answer 8

• justify actions

- like I’m being underpaid

Question 9

Establishment of Responsibility

Answer 9

• control is most effective when only one person is responsible for a given task
• limit access to authorized personnel and then identify those personnel
• pass codes for who entered certain things

Question 10

Segregation of Duties

Answer 10

• different individuals should be responsible for related activities
• the responsibility for record-keeping for an asset should be separate from the physical custody of that asset

Question 11

Information and Communication

Answer 11

• information must be communicated up and down the chain

- and to external parties

Question 12

Monitoring

Answer 12

• internal controls must be monitored periodically

- significant deficiencies need to be reported to top management or the board of directors

Question 13

Documentation procedures

Answer 13

• pre numbered documents and all documents should be accounted for
• pre numbering helps to prevent a transaction from being recorded more than once or conversely from not being recorded at all
• promptly forward source documents to the accounting department. helps to ensure timely recording of the transaction

Question 14

Physical Controls

Answer 14

relate to the safeguarding of asset and enhance the accuracy and reliability of the accounting records

Question 15

Examples of Physical Conttrols

Answer 15

• safes, vaults, and safety deposit boxes fro cash and business papers
• locked warehouses and storage cabinets
• computer facilities with pass key access or fingerprint or eyeball scans
• alarms to prevent break-ins
• television monitors and garment sensors
• time clocks for recording time worked

Question 16

Independent Internal Verification

Answer 16

• companies should verify records periodically or on a surprise basis
• an employee who is independent of the personnel responsible for the information should make the verification
• discrepancies and exceptions should be reported to a management level that can take appropriate corrective action

Question 17

Human resource controls

Answer 17

-bond employees who handle cash
…screens all individuals before adding them to the policy
…company will vigorously persecute offenders

Rotate employees and require employees to take vacations

Conduct through background checks

…make sure they really graduated from schools
….never use telephone numbers provided

Question 18

Limitations of Internal Controls

Answer 18

• cost benefit(reasonable assurance)
• human element
• collusion
• technological

Question 19

Reasonable Assurance

Answer 19

-cost of establishing control procedures should not exceed their expected benefit

Question 20

Human element

Answer 20

a good system can be ineffective as a result of employee fatigue ,carelessness, or indifference

Question 21

Collusion

Answer 21

-to individuals working together to get around prescribed controls

Question 22

Cash Management Principles

Answer 22

-see handout