Ch. 7: Fraud, Internal Control, and Cash
Human Resource Controls:
1. Bond employees who handle cash 2. Rotate employee's duties, require vacations 3. Conduct thorough background checks
fraud
A dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.
What asset is most susceptible to fraudulent activities?
Cash
2. Risk assessment
Companies must identify and analyze the various factors that create risk for the business and must determine how to manage these risks.
reasonable assurance
Companies put things in place to safeguard their assets and reliability of accounting records but only to the extent that the benefit of these procedures will outweigh the cost.
Internal Control
Consists of all the related methods and measures adopted within an organization to safeguard assets, enhance the reliability of accounting records, increase efficiency of operations, and ensure compliance with laws and regulations.
5. Monitoring
Internal control systems must be monitored periodically for their adequacy.
Bonding
Obtaining insurance protection against theft by employees. Insurance may reject risky employees, and heavily prosecute employees who have committed theft later on.
3 main factors that contribute to fraudulent activity
Opportunity, Rationalization, Financial Pressure
What types of businesses are most at threat for fraud theft?
Small businesses of 100 employees or less.
3. Control activities
To reduce the occurrence of fraud, management must design policies and procedures to address the specific risks faced by the company.
1. Control environment
Top management must make it clear that the organization values integrity and that unethical activity will not be tolerated.
6 principles of a control environment
establish responsibility, segregate duties, documentation procedures, physical controls, independent internal verification, human resource controls.
4. Information and communication
the internal control system must capture and communicate all information both down and up the organization, as well as communicate info to appropriate external parties.
