Chapter 3: Ethics, Fraud, And Internal Control Flashcards Preview

BUS 319: Accounting Information Systems > Chapter 3: Ethics, Fraud, And Internal Control > Flashcards

Flashcards in Chapter 3: Ethics, Fraud, And Internal Control Deck (65):
1

Ethics

Pertains to the principles of conduct that individuals use in making choices and guiding their behavior in situations that involve the concept of right and wrong

2

Business Ethics

Involves finding the answers to 2 questions. How do managers decide what is right in conducting business? And how do they achieve what is right?

3

Computer Ethics

Is the analysis of the nature and social impact of computer technology and the corresponding formulation and justification of policies for the ethical use of such technology

4

Privacy

People desire to be in full control of what and how much information about themselves is available to others

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Security

Is an attempt to avoid such undesirable events as a loss of confidentiality or data integrity

6

Fraud

Denotes a false representation of a material fact made by one party to another party with the intent to deceive the other party to justifiably rely on the fact

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False Representation

There must be a false statement or a non disclosure

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Material Fact

A fact must be a substantial factor in inducing someone to act

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Intent

There must be the intent to deceive or the knowledge that one's statement is false

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Justifiable Reliance

The misrepresentation must have been a substantial fact on which the injured party relied

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Injury or Loss

The deception must have caused injury or loss to the victim of the fraud

12

Employee Fraud

Is generally designed to directly convert cash or other assets to the employee's personal benefit

13

Management Fraud

Usually does not involve the direct theft of assets. Is usually done by top management where internal controls can't detect

14

Fraud Triangle

Consists of situational pressure, opportunity, and ethics

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Fraudulent Statements

Are associated with management fraud. The financial statement misrepresentation must bring direct or indirect financial benefit to the perpetrator

16

Corruption

Involves an executive, manager or employee of the organization in collusion with an outsider. 10% of occupational fraud cases

17

Bribery

Involves giving, offering, or soliciting things of value to influence an official in the performance of their lawful duties

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Illegal Gratuity

Involves giving or receiving something of value because of an official act that has been taken

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Conflict of Interest

Occurs when an employee acts on behalf of a third party during the discharge of their duties or has self interest in the activity

20

Economic Extortion

Is the use of force by an individual or organization to obtain something of value

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Skimming

Involves stealing cash from an organization before it is recorded on the organization's books and records

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Cash Larceny

Involves schemes in which cash receipts are stolen from an organization after they have been recorded in the organization's books and records

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Lapping

In which the cash receipts clerk first steals and cashes a check from customer A and makes up the difference from customer B

24

Vendor Fraud

Are perpetrated by employees who cause their employer to issue a payment to a false supplier by submitting invoices for goods and services

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Shell Company

First requires that the perpetrator establish a false supplier in the books of the victim company. Them by issuing false invoices creates payments to this false supplier

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Pass Through Fraud

Is similar to a shell company fraud with the exception that a transaction has taken place. Inventory is purchased from a legitimate supplier then the place is inflated by a fake supplier before being sold to the victim company

27

Pay and Return

Involves a clerk with check writing authority who intentionally pays a vendor twice for the same invoice. The supplier reimburses one of the checks and the employee takes the cash

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Check Tampering

Involves forging or changing in some material way a check that the organization has written to a legitimate payee.

29

Payroll Fraud

Is the distribution of fraudulent paychecks

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Expense Reimbursement Fraud

Involves false or inflated expense reimbursements

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Non Cash Misappropriations

Involve the theft of non cash assets like inventory or information

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Internal Control System

Consists of policies, practices, and procedures to achieve objectives

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Management Responsibility

The establishment and maintenance of a system of internal control is the responsibility of management

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Reasonable Assurance

Cost of achieving objectives should not outweigh the benefits

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Methods of Processing

Control techniques vary with different types of technology

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Limitations of Internal Control

Possibility of error, circumvention, management override, and changing conditions

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Exposure

The absence or weakness of a control

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Preventive Controls

Are passive techniques designed to reduce undesirable events by forcing compliance with prescribed or desired actions

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Detective Controls

Are designed to identify undesirable events that elude preventive controls

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Corrective Controls

Are actions taken to reserve the effects of errors detected

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Sox Section 302

Requires management to certify organization's internal on a quarterly and annual basis

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Sox Section 404

Requires management to assess internal control effectiveness

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Control Environment

Set the tone for the organization and influences control awareness

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Risk Assessment

To identify, analyze, and manage financial reporting risks

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Monitoring

Is the process by which the quality of internal control design and operations can be assessed

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Control Activities

Are policies and procedures to ensure appropriate actions are taken to deal with identified risks

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Transaction Authorization

Is to ensure all material transactions processes are valid

48

Segregation of Duties

Designed to minimize incompatible functions including separating transaction authorization and asset custody and record keeping

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Supervision

Is a compensating control in organizations too small for sufficient segregation of duties

50

Accounting Records

Consist of source documents, journals, and ledgers which provide an audit trial

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Access Controls

Ensure that only authorized personnel have access to firm assets

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Independent Verification Procedures

Are checks to identify errors and misrepresentations

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Check Digit

Is a control digit that is added to the data code when originally assigned

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Missing Data Check

Identifies blank or incomplete input fields

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Numeric Alphabetic Check

Indemnified data in the wrong form

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Limit checks

Identify fields that exceed authorized limits

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Range Checks

Verify that all amours fall within an acceptable range

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Reasonableness Checks

Verify that amounts that have based limit and range checks are reasonable

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Validity Checks

Compares actual fields against acceptable values

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Processing Controls

Are programmed procedures to ensure an applications logic is functioning properly

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Batch Controls

Manage the flow of high volume transactions and reconcile system output with original input

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Audit Trail Controls

Ensure every transaction can be traced through each stage to processing from source to financial statements

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Grandfather Father Son Backup

Used with systems that use sequential master files

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Destructive Update

Approach leaves no backup copy and requires a special recovery program if data is destroyed or corrupted

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Output Controls

Are procedures to ensure output is not lost, misdirected or corrupted and that privacy is not violated