Chapters 7 and 8 Flashcards
It sets the tone of an organization influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipling and structure.
Control Environment
What are the factors of control environment?
(4)
- Includes integrity, ethical values, and competence of the entity’s people
- Management’s philosophy and operating style
- The way management assigns authority and responsibility, and organizes and develops its people
- The attention and direction provided by the BoD
Control Objectives for a Review of the Control Environment
(2)
- To ensure that management conveys the message that integrity, ethical values, and commitment to competence cannot be compromised, and that employees receive and understand that message.
- To ensure that management continually demonstrates by word and action, commitment to high ethical and competence standards.
It is an intentional, deceitful act for gain with concealment.
More than theft
Fraud
It may be perpetrated by one person working on his or hew own, but many of it are able to occue as a result of collusion.
Difficult to prevent and detect due to collusion characteristics.
It is theft by a person in a position of trust.
Defalcation
Classifications of fraud
(4)
- management fraud (fraudulent financial reporting)
- employee fraud
- outsider fraud
- collusive fraud
*may be continuous
*may require no further direct action by the defrauder once they have been set u[
*some require continuous maintenance by the defrauder
*some are not continuous but have a “smash and grab” character
Primary goal of Sarbanes Oxley Act
passed on July 30, 2002
Senator Paul Sarbanes; US representative Michael G. Oxley
To protect investors by improving the accuracy and reliability of financial reporting and corporate disclosures. Its sections regulate corporate governance, risk management, auditing, and public company financial reporting with the goal of reducing accounting fraud and corporate corruption.
It requires management of US quoted companies to establish, maintain, assess and certify to an adequate internal control structure for financial reporting. It also requires the company’s external auditors to attest to, and report on, management’s assessment.
Section 404 (management assessment of internal Control)
Triple audit
a. the traditional audit of the financial statements
b. the audit by the external auditor of internal control over financial reporting, and
c. the auditor’s attestation of management’s assessment of and certification to the effectivieness of internal control over financial reporting
External auditor of the company, rather than another firm of public accountants, who must undertake the audit work.
It makes an audit committee a staturoy listing requirement and sets out other statutory requirements for audit committees. These include, but are not limited to, giving the audit committee direct responsiblity fo rthe appointment, compensation and oversight of the external auditor.
Section 301
SEC definiton of an audit committee financial expert
a person wil ALL of the FIVE attributes
- An understanding of generally accepted accounting principles and financial statements
- The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;
- Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s financial statements, or experience actively supervising one or more persons engaged in such activities;
- An understanding of internal controls and procedures for financial reporting; and
- An understanding of audit committee functions.
