ACG2021 - Chapter 5

Internal control - Components

1. Control environment - Refers to the attitude that people in the organization hold regarding internal control. 2. Risk assessment 3. Control activities 4. Information and communication 5. Monitoring activities

Principles of Control Activities

1. Establish responsibilities 2. Segregate duties - Involves assigning responsibilities so that one employee can't make a mistake or commit a dishonest act without someone else discovering it. 3. Restrict access 4. Document procedures 5. Independently verify

Controls from bank procedures

1. Restricting access 2. Documenting procedures 3. Independently verifying

Voucher system

A process for approving and documenting all purchases and payments made on account.

Sarbanes-Oxley Act (SOX)

A set of regulation to counteract fraud 1. Counteract incentives - Those who willfully misrepresent financial results face stiff penalties 2. Reduce opportunities - All public companies are required to: • Establish an audit committee of independent directors • Evaluate and report on the effectiveness of internal control over financial reporting 3. Encourage honesty

Petty cash fund

A system used to reimburse employees for expenditures they have made on behalf of the organization. - Payments out of petty cash are not recorded in the accounting system until the fund is replenished. - Petty cash account is only used once, when being established - One person in charge - To replenish: debit actual expenses, credit cash

Internal control

Consists of the actions taken by people at every level of an organization to achieve its objectives relating to: • Operations • Reporting • Compliance Primary goal for cash receipts is to ensure that the business receives the appropriate amount of cash and safety deposits it in the bank.

Electronic funds transfer (EFT)

Occurs when a customer electronically transfers funds from his or her bank account to the company's bank account.

Bank reconcilliation

Provides independent verification of all cash transactions that the bank has processed for the company.

Cash equivalents

Short-term, highly liquid investments purchased within three months of maturity.

Cash overage

Reported under Stockholders' Equity on Financial Statements

Loan covenants

Require the company to achieve financial targets such as maintaining specific levels of assets or stockholders' equity.

Imprest system

Restricts the total amount paid to others by limiting the amount of money available to be transferred.

Direct deposits

Salaries and wages paid to employees through EFTs.

Controls for cash payments

The primary goal of internal controls for all cash payments is to ensure that the business pays only for the properly authorized transactions.

Remittance advice

What a customer uses to explain the purpose of a payment.

Fraud

• Generally defined as an attempt to deceive others for personal gain. • Employee fraud is often grouped into three categories: 1. Corruption - Involves misusing one's position for inappropriate personal gain. 2. Asset misappropriation - Theft 3. Financial statement fraud - Involves misreporting amounts in the financial statements, usually to portray more favorable financial results than what actually exist.

The Fraud Triangle

• Incentive • Opportunity • Rationalization