Chapter 7: Fraud and Internal Control Flashcards
Define fraud
A dishonest act by an employee that results in personal benefit to the employee at a cost
What three factors contribute to fraudulent activity?
- Opportunity
- Financial pressure
- Rationalization
What are the five primary components of internal control?
- Control environment
- Risk assessment
- Control activities
- Information and communication
- Monitoring
What are the six principles of internal control activities?
- Establishment of responsibility
- Segregation of duties
- Documentation procedure
- Physical controls
- Independent internal verification
- Human resource controls
What is the establishment of responsibility?
Limiting access only to authorized personnel and then identifying those personnel
Ex: In cash receipt controls, only designated personnel are authorized to handle cash receipts (cashiers)
What is the segregation of duties?
Different individuals should be responsible for related activities, and no one should have overlapping duties.
What is meant by documentation procedure?
Companies should use prenumbered documents and all documents should be accounted for
What are physical controls?
Safes, vaults, alarms, keys, passwords, etc.
What is independent internal verification?
An independent employee periodically verifies records. Any discrepancies are reported to management.
What is human resource controls?
Be able to identify which employees handled cash, rotate employees duties and require vacations, conduct background checks
How should mail recipts be handled with internal controls?
- Opened by two people
- Clerk signs the list
- Original copy of the list
- Copy of the list
What is a good way to think of Petty cash funds?
Like pocket money
What three things are involved with petty cash?
- Establshing the fund
- Making payments form the fund
- Replensihing the fund
How do banks contribute significantly to good internal control regarding cash?
- Minimize the amount of currency on hand
- Creates a double record of bank transactions
- Bank reconciliation
What 7 items are on a bank reconciliation?
- Deposit in transit
- Outstanding checks
- Company errors
- Interest earned
- NSF checks
- Bank service charge
- Bank errors
The above are also known as time lags
