Chapter 7 powerpoint Flashcards
Fraud
A dishonest act by an employee that results in personal benefit to the employee at a cost to the employer
Fraud triangle
Opportunity
Pressure
Rationalization
Opportunity
Lack of sufficient controls, inadequate employee monitoring, a belief that they will not be caught
Pressure
Employee has debt or a desire to lead to a lifestyle they cannot afford
Rationalization
Justification by the employee as to why they commited fraud
ex. deserve more
SOX - internal controls
All publicly traded corporations are required to maintian adequate internal control
Requires disclosure of material weakness
Material Weakness
A significant deficiency or combination of significant deficiencies, that results in more than a remote liklihood that a material misstatement of the annual or interim financial statements will not be prevented or detected
*will we catch a deficiency
Purpose of Internal Control
Safeguard Assets
Ensure Compliance with Laws and Regulations
Increase Financial Statement Reliability
Increase Operational Efficiency
Primary Components of Internal Control System
Control Environment
Risk Assesment
Control Activities
Information & Communication
Monitoring
Control Environment
“Tone at the top”
Management’s message to the employees that the organization values integrity and will not tolerate unethical activity
Risk Assesment
Consists in two places:
- Identification and analysis of potential sources of risk for the company
- Strategic management of those risks
Control Activities
Polices and procedures designed and implemented by management to address specific risks identified in the risk assesment phase
Information and Communication
Internal control system should do two systems:
- Capture pertinent information for employees at all levels of the company
- Communicate this information to approriate parties
Monitoring
Employees and the internal control system should be continually monitored to asses its adequacy and any significant deficiencies should be communicated to management
6 principles of Control Activities
Establishment of Responsibility
Segregation of duties
Documentation procedures
Physical Controls
Idependent Internal Verification
Human Resource Controls
Establishment of Responsibility
Assign responsibility to specific employees
Most effective when only one person is responsibile for a given task
Segregation of Duties
Different individuals are responsibile for related activities
ex. one person orders goods, another approves, another pays
Responsibility for record-keeping of an asset should be seperate from physical control of the asset
Documentation procedures
Provide evidence that transactions & events have occurred
*prenumbered documents to ensure all accounted for
* Promptly forward source documents for accounting department to ensure timely recording of transaction
Physical Controls
The safeguarding of assets, enhancement of accuracy and reliability of accounting records
Independent Internal Verification
Review records and transactions periodically or on a surprise basis
Employee that reviews should be indepndent of personnel responsible for the information *internal auditor*
Discrepancies should be reported to management
Human Resource Controls
Bonding Employees: Insurance protetion against theft by employees
Employee Rotations/required vacations: Deters employees because not able to permanently conceal theft, fraud, etc.
Background checks
Limitations of Internal Control
Reasonable Assurance (Not total) - Costs should not exceed Benefits
Human element - employee fatigue or carelessness or Mistakes
- collusion
Size of the Business: Usually a larger company will have internal auditors
Collusion
Two or more individuals who work together to get around prescribed controls
