Accounting Ch. 7

What does it mean to segregate related activities?

having multiple individuals responsible for related activities so that the potential for errors and irregularities decreases

Human element

important factor in every system of internal control

Physical controls

activities that relate to the safeguarding of assets and enhance the accuracy and reliability of accounting records

Sarbanes-Oxley Act

all publicly traded U.S. corporations are required to maintain an adequate system of internal control

Voucher

an authorization for prepared for each expenditure in a voucher system

Why is it important to establish responsibility?

because control is most effective when only one person is responsible for a given task

Internal auditors

company employees who continuously evaluate the effectiveness of the company's internal control systems

What is reasonable assurance?

concept of reasonable assurance rests on the premise that the costs of establishing control procedures should not exceed their expected benefit

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

Financial pressure

personal financial problems caused by too much debt makes employees desperate -or they want to live a lifestyle they cannot afford on their current salary

Independent internal verification is especially useful when comparing what two things?

recorded transactions with existing assets

What are the principles of control activities?

-establishment of responsibility -segregation of duties -documentation procedures -physical controls -independent internal verification -human resource controls

What are some examples of human element having a factor in internal control?

-good system becomes ineffective as a result of employee fatigue, carelessness, or indifference -receiving clerk doesn't bother to count the goods received and just fudges it

How do over the counter receipts prevent cash fraud?

-price clearly visible to customer -itemized cash register receipt slip received -counts change

Why is cash the most susceptible to fraudulent activities?

-readily convertible into any other type of asset -easily concealed and transported -highly desired

What are some of the jobs that internal auditors do?

-review the activities of departments and individuals to determine whether prescribed internal controls are being followed -recommend improvements when needed

What are the 5 primary components of internal control?

1. a control environment 2. risk assessment 3. control activities 4. information and communication 5. monitoring

What are some human resource control activities?

1. bond employees who handle cash 2. rotate employees' duties and require employees to take vacations 3. conduct thorough background checks

What 3 things should companies do to obtain maximum benefit from independent internal verification?

1. companies should verify record periodically or on a surprise basis 2. an employee who is independent of the personnel responsible for the information should make the verification 3. discrepancies and exceptions should be reported to a management level that can take appropriate corrective action

What are the two common applications of segregation of duties?

1. different individuals should be responsible for related activities 2. the responsibility for record-keeping for an asset should be separate from the physical custody of that asset

What are the three main factors that contribute to fraudulent activity? How are they depicted?

1. opportunity 2. financial pressure 3. rationalization Form the Fraud triangle

What are two documentation procedures that are necessary for preventing fraudulent activities?

1. prenumbered documents, and all documents should be accounted for 2. require that employees promptly forward source documents for accounting entries to the accounting department

In what two ways does bonding contribute to the safeguarding of cash?

1. the insurance company carefully screens all individuals before adding them to the policy and may reject risky applicants 2. bonded employees know that the insurance company with vigorously prosecute all offenders

Fraud

a dishonest act by an employee that results in personal benefit to the employee at the cost to the employer

Voucher system

a network of approvals by authorized individuals, acting independently, to ensure that all disbursements by check are proper

_____ is the asset most susceptible to fraudulent activities.

cash

Risk assessment

companies must identify and analyze the various factors that create risk for the business and must determine how to manage these risks

Public Company Accounting Oversight Board (PCAOB)

created by SOX to establish auditing standards and regulate auditor activity

How does rotating employees' duties and requiring employees to take vacations contribute to the safeguarding of cash?

deters employees from attempting theft since they will not be able to permanently conceal their improper actions

Monitoring

internal control systems must be monitored periodically for their adequacy. Significant deficiencies need to be reported to top management and/or the board of directors

Bonding

involves obtaining insurance protection against theft by employees

What are some examples of physical controls?

locking rooms, employee users ID necessary to enter cash register, can track with it

Control activities

management must design policies and procedures to address the specific risks faced by the company

Information and communication

must capture and communicate all pertinent information both down and up the organization, as well as communicate information to appropriate external parties

Companies require vouchers for all types of cash disbursement except those from...

petty cash

Rationalization

rationalizing dishonest actions (underpaid but employer is making lots of money)

Companies generally design their system so internal control to provide ______ ________ of proper safeguarding of assets and reliability of the accounting records

reasonable assurance

Size of the business

small companies often find it difficult to segregate duties or to provide the independent internal verification

Why is segregation of record-keeping from physical inventory effective?

the custodian of the asset is not likely to convert the asset to personal use when one employee maintains the record of the asset, and a different employee has physical custody of the asset

What happens in the books when sales don't match the amount of cash in the register?

the difference goes into a Cash Over and Short account

A control environment

the responsibility of top management to make it clear that the organization values integrity and that unethical activity will not be tolerated

What is the rationale for segregation of duties?

the work of one employee should, without a duplication of effort, provide a reliable basis for evaluating the work of another employee

When are cash disbursement controls more effective?

when companies pay by check ore electronic funds transfer (EFT) rather than by cash

What is the one exception of this?

when payments for incidental amounts that are paid out of petty cash

When do these opportunities usually occur?

when the workplace lacks sufficient controls to deter and detect faud

Collusion

when two or more individuals work together to get around prescribed controls -significantly reduces the effectiveness of the system, eliminating the protection offered by segregation of duties

Opportunity

workplace must provide opportunities for that an employee can exploid