Chapter 7 Flashcards
fraud
a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer
the fraud triangle
opportunity, financial pressure, and rationalization
sarbanes-oxley act
maintain adequate system of internal control
corporate execs and outside auditors must attest to the adequacy of the controls
also created PCAOB
internal control
a process designed to provide reasonable assurance regarding the achievement of company objectives related to operations reporting and compliance
purpose of internal controls
safeguard assets, enhance the reliability of accounting records, increase efficiency of operations, and ensure compliance with laws and regulations
primary components of internal control
control environment, risk assessment, control activities, info and communication, and monitoring
control environment
management should make it clear that integrity is valued and that unethical activity will not be tolerated
risk assessment
identify and analyze dif factors that create risk and determine how to manage these risks
control activities
to reduce the possibilities of fraud, management must design policies and procedures to address the specific risks
info and communication
the system must capture/communicate all pertinent info both down and up the org, and communicate info to appropriate external parties
monitoring
systems must be monitored for their adequacy-significant deficiencies need to be reported to top management
6 principles of control activities
establishment of responsibility segregation of duties documentation procedures physical controls independent internal verification human resource controls
establishment of responsibility
most effective when only one person is responsible for a given task (passcodes)
segregation of duties
dif individuals should be responsible for related activities
responsibility for record keeping for an asset should be separate from the physical custody of the asset
segregation of related activities
purchasing activities separate from sale activities
accountant shouldn’t touch the asset
asset custodian shouldn’t touch the accountant records
documentation procedures
provide evidence of transactions/events have occured-use pre-numbered documents
independent internal verification
review of data prepared by employees (companies should verify records periodically or on a surprise basis) an employee who is independent of the personnel responsible for the info should make the verification
internal auditors
company employees who continuously evaluate the effectiveness of the company’s internal control systems
human resource controls
bond employees who handle cash (bonding-obtaining insurance protection against theft by employees) rotate employees duties and require employees to take vacations-conduct thorough background checks
limitations of internal control
reasonable assurance
human element
collusion
size of the company
cash over and short account
used for the amount of money over and short deposited-account record (based on tape) is dif than deposited amount) -often occurs from cashier handing back wrong amount of change
cash disbursement controls
internal controls are more effective when companies pay by check or EFT rather than cash
use of a bank
safe place to deposit money and minimize the amount of money on hand
keeps records of balances/transactions
bank statements:
- checks paid and other debits that reduce the balance (debit card transactions and EFTs for bill paymnts)
- deposits and other credits that increase the balance (direct deposit, automated teller machine, EFT)
- debit memorandum (bank service charge, NSF check)
- credit memorandum (collection of notes receivable, interest earned)
- the account balance after each days transactions
bank rec order
per bank statement: + deposits in transit - outstanding checks +/- bank errors
per books: + notes collected by bank -NSF checks - service charges +/- bank errors
each reconciling entry from the bank rec will always involve ______ as either a debit or a credit
CASH
cash equivalents
treasury bills, commercial paper, and market funds
restricted cash
not available for general use
set aside for special purpose
reported separately on balance sheet
capital investment
money can be used to make purchases of PP&E to sustain long-term production
objective of managing cash
ensure the company has sufficient cash to meet payments
minimize the amount of idle cash on hand
