Chapter 7 Flashcards
Internal Controls
refers to the safeguards the organization build within its own system of recording
Five purposes of internal controls
-check handout
Fraud Triangle
- opportunity
- financial pressure
- rationalization
Control environment includes
-check handout
fraud
is a dishonest act by an employee that results in personal benefits to the employee at a cost to the employer
Opportunity
workplace lacks sufficient controls to deter and detect fraud
Financial Pressure
personal financial problems caused by too much debt
Rationalization
- justify actions
- like I’m being underpaid
Establishment of Responsibility
- 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
Segregation of Duties
- 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
Information and Communication
- information must be communicated up and down the chain
- and to external parties
Monitoring
- internal controls must be monitored periodically
- significant deficiencies need to be reported to top management or the board of directors
Documentation procedures
- 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
Physical Controls
relate to the safeguarding of asset and enhance the accuracy and reliability of the accounting records
Examples of Physical Conttrols
- 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
Independent Internal Verification
- 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
Human resource controls
-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
Limitations of Internal Controls
- cost benefit(reasonable assurance)
- human element
- collusion
- technological
Reasonable Assurance
-cost of establishing control procedures should not exceed their expected benefit
Human element
a good system can be ineffective as a result of employee fatigue ,carelessness, or indifference
Collusion
-to individuals working together to get around prescribed controls
Cash Management Principles
-see handout
