Accounting Chapter 4

Sarbanes-Oxley Act

referred to as SOX. the act established a variety of guidelines related to auditor-client relations and internal control procedures

4 components of internal control

1. monitoring 2. control activities 3. risk assessment 4. control environment

fraud triangle

1. motive 2. rationalization/justification 3. opprotunity

ACFE

Association of Certified Fraud Examiners

who is responsible for establishment's success?

CEO and CFO

managers are entrusted with...

liabilities and stockholder's equity

does the company maintain adequate internal controls?

management's discussion, auditor's opinion. If management of auditor notes any deficiencies in internal controls, financial accounting may be unreliable.

Major provisions of SOX

oversight board, corporate executive accountability, non audit services, retention of work papers (7 years), auditor rotation (every 5 years), conflicts of interest, hiring of auditor though board of directors of company, and internal control

2. control activities

policies and procedures that ensure management's directives are carried out. Includes authorizations, reconciliations, and separation of duties.

4. control environment

sets ethical tone of company. includes formal policies related to management's philosophy, assignment of responsibilities, and organizational structure.

2 of the highest-profile accounting fraud cases (2000s)...

Enron and WorldCom. Both overvalued the company's stock and declared bankruptcy when failed.

internal controls

eliminates opportunity for fraud. 1. safeguard the company's assets 2. improve accuracy and reliability of accounting info

3. risk assessment

identifies and analyzes internal/external risk factors that could prevent company's objectives from being achieved

can effective internal controls and ethical employees ensure a company's success?

no

fraud

occurs when a person intentionally deceives another person for personal gain to damage that person

collusion

occurs when two or more people act in coordination to bypass internal controls

1. monitoring

reporting deficiencies is required. includes formal procedures for repeating control deficiencies

occupational fraud

use of one's occupation for personal enrichment through the deliberate misuse of the employer's resources