Chapters 5-7 Flashcards
5 primary components of internal control
Control environment Risk assessment Control activities Information and communication Monitoring
What is control environment
Top Management makes it clear that any unethical activity will not be tolerated
What is risk assessment
Companies must identify and analyze various risk factors that create risk for the business and then see how to fix these risks
What are control activities
To reduce occurrence of fraud, management must design policies to address specific risks
Information and communication
Must capture and communicate all pertinent information both down and up the organization
Monitoring
Internal control systems must be monitored periodically for their adequacy
Three principles of control activities
Establishment of responsibility:only one person is responsible for a given task
Segregation of duties: different individuals should be responsible for related activities
Documentation procedure: companies should use prenumbered docs. And all docs should be accounted for
What are physical controls
Think of safes, key cards, alarms, locked warehouses
What is the difference between segregation of duties and independent internal verification
There is a segregation of duties when related activities occur, these segregated duties are monitored by an independent individual
Human resource controls
Bond employees
Require vacation
Rotate duties
Background checks
Voucher system controls
Network of approvals by authorized individuals, acting independently, to ensure that all disbursement day check are proper
When doing a reconciliation what goes on the bank side
Deposit in transit
(Outstanding checks)
+-bank errors
When doing a reconciliation what goes on the books side
Notes collected by bank
(NSF checks)
(Service charge)
+-company errors
Cash and Cash equivalents
Treasury bills, short term corporate notes, and money market funds
Fob shipping
Buyer pays freight and gets ownership when the goods are picked up by the carrier
