Chapter 5 Practice Material

what are five common internal control principles?

1. Establish responsibility: assign each task to only one employee. 2. Segregate Duties: do not make one employee responsible for all parts of a process. 3. Restrict Access: do not provide access to assets or information unless it is needed to fulfill assigned responsibilities. 4. Document Procedures: prepare documents to show activities that have occurred. 5. Independently Verify: Check others' work.

what are the three points of the fraud triangle? is fraud more or less likely to occur if one of these elements is missing?

1. Incentive: employee has a reason for committing fraud. 2. Opportunity: employee has a means of committing fraud. 3. employee perceives the misdeed as unavoidable or justified. - Less likely

what three types of objectives are the focus of internal control?

1. Operations: focus on completing work efficiently and effectively & protecting assets by reducing the risk of fraud. 2.Reporting: producing reliable and timely accounting information for use by people internal and external to the organization. 3. Compliance: focus on adhering to laws and regulations

what are two limitations of internal control?

1. an organization will implement internal controls only to the extent their benefits exceed their costs. 2. internal controls can fail as a result of human error or fraud.

what internal control functions are performed by a cash register and point-of-sale system? how are these functions performed when cash is received by mail.

1. document the amount charges for each item sold 2. restrict access to cash 3. document the total cash sales Mail: mail clerk lists all amounts received on a cash receipt list, customer includes a remittance advice (what is being paid), mail clerk & supervisor sign completed cash receipts list, stamp check "For Deposit Only."

define cash and cash equivalents and indicate the types of items that should be reported as cash and cash equivalents.

Cash: money or any instrument that banks will accept for deposit and immediately credit to the company's account, such as a check, money orderer bank draft. Cash Equivalents: short-term, highly liquid investments purchased within three months of maturity. (certificates of deposit, money market funds, government treasury bills, highly liquid investments.

define restricted cash and indicate how it should be reported on the balance sheet.

Restricted Cash: not available for general use but rather restricted for a specific purpose. - separately

what aspect(s) of the Sarbanes-Oxley Act might counteract the incentive to commit fraud?

Stiff penalties: - fines of up to $5 million + repayment of any fraud proceeds. - maximum jail sentences, 20 yrs, terms per each violation.

what is the primary internal control goal for cash receipts?

to ensure the business receives the appropriate amount of cash and safely deposits it in the bank.

what aspect(s) of the Sarbanes-Oxley Act might reduce opportunities for fraud?

- Establish an audit committee of independent directors - Evaluate and report on the effectiveness of internal control over financial reporting.

what are some of the methods for restricting access?

- physically locking up assets -electronically securing access to assets and information -restrict access to check-signing equipment -require a passcode to open registers -firewalls

what aspect(s) of the Sarbanes-Oxley Act might allow honest employees to prevail?

- tip lines - legal protection to whistleblowers - companies are required to adopt a code of ethics for their senior financial officers.

in what ways does documentation act as a control?

-a company creates a record of whether goods were shipped, customers were billed, cash was received, and so on. -assign sequential numbers to their documents.

in what ways can independent verification occur?

-hire someone (auditor) to insure the work done is appropriate & supported by documentation. -independent verification as part of one's job. -comparing company's information to information kept by an independent third party.

what are the five components of an internal control system?

1. Control Environment: attitude people in the organization hold regarding internal control. 2. Risk Assessment: assess potential for fraud and other risks. 3. Control Activities: responsibilities and duties completed by employees to reduce risks to an acceptable level. 4. Information and Communication: internal control system generates and communicated information about activities affecting the organization to support sound decision making. 5. Monitoring Activities: internal control system is evaluated often to determine whether it is working as intended.

what are the three categories of employee fraud? which is most common? which is associated with the largest losses?

1. Corruption: involves misusing one's position for inappropriate personal gain. 2. Asset Misappropriation: theft (embezzlement). (Most Common) 3. Financial Statement Fraud: misreporting amounts in the financial statements, usually to portray more favorable financial results than what actually exists. (Largest Losses)

why would managers misrepresent the financial results of their companies?

To make the company look better.

in what way does a mandatory vacation policy act as a control?

because it is difficult for them to cover prior thefts while they are away from the business.

why is it a good idea to assign each task to only one employee?

it allows you to determine who caused any errors or thefts that occur.

how is cash received in person independently verified?

manager compares summarized cash receipts and bank stamped deposit slip.

what are the purposes of a bank reconciliation? what balances are reconciled?

provides independent verification of all cash transactions the bank has processed for the company. bank statement & cash accounts

why should responsibilities for certain duties, like cash handing and cash recording, be separated? what types of responsibilities should be separated?

so that one employee can't make a mistake or commit a dishonest act without someone else discovering. Any responsibilities involving assets (cash)

what is the primary internal control goal fro cash payments?

to ensure the business pays only for properly authorized transactions