Chapter 5 Flashcards
(46 cards)
An attempt to deceive others for personal gain.
Fraud
Types of Fraud:
(1) Corruption
(2) Asset Misappropriation
(3) Financial Statement Fraud
Misusing one’s position for inappropriate personal gain.
Corruption
Theft where cash is usually the target, but other assets can be misappropriated.
Asset Misappropriation
Involves misreporting amounts in the financial statements, usually to portray more favorable financial results than what actually exist.
Financial Statement Fraud
Consists of the actions taken by people at every level of an organization to achieve its objectives.
Internal Control
Types of Internal Control Objectives:
(1) Operations
(2) Reporting
(3) Compliance
Focus on completing work efficiently and effectively and protecting assets by reducing the risk of fraud.
Operations Objectives
Includes producing reliable and timely accounting information for use by people internal and external to the organization.
Reporting Objectives
Focus on adhering to laws and regulations.
Compliance Objectives
Principle of Control Activities:
(1) Establish responsibility
(2) Segregate duties
(3) Restrict access
(4) Document Procedures
(5) Independently verify
Whenever possible, assign each task to only one employee. Doing so will allow you to determine who caused any errors or thefts that occur.
Establish Responsibility
Involves assigning responsibilities so that one employee can’t make a mistake or commit a dishonest act without someone else discovering it. One employee should not initiate, approve, record, and have access to the items involved in the same transaction.
Segregation of Duties
Some controls involve rather obvious steps such as physically locking up valuable assets and electronically securing access to other assets and information. Companies restrict access to check-signing equipment, require a passcode to open cash registers, and protect computer systems with firewalls. If employees do not need assets or information to fulfill their assigned responsibilities, they are denied access.
Restrict Access
Digital and paper documents are such common features of business that you may not realize they represent an internal control. By documenting each business activity, a company creates a record of whether goods were shipped, customers were billed, cash was received, and so on. To enhance this control, most companies assign sequential numbers to their documents and check that they are used in numerical sequence. This check occurs frequently, sometimes daily, to ensure that every transaction is recorded and that each document number corresponds to one and only one accounting entry.
Document Procedures
Hire someone (an auditor) to check that the work done by others within the company is appropriate and supported by documentation
Independently Verify
Internal controls can never completely prevent and detect errors and fraud for two reasons:
(1) Benefits must exceed the costs
(2) Human error or fraud
Internal controls for cash are important because:
The volume of cash transactions is enormous and because cash is valuable and portable and therefore poses a high risk of theft.
Businesses can receive cash in two different ways:
(1) Receive cash in person at time of sale
(2) Receive cash remotely
Primary Internal Control Goal for Cash Receipt:
Ensure that the business receives the appropriate amount of cash and safely deposits it in the bank.
Shortage of Cash Journal Entry:
Cash (Debit)
Cash Shortage (Debit)
Sales Revenue (Credit)Principle of Control Activity: Scans items sold
Document procedures
Principle of Control Activity: Collects customer payment
Restricts access
Principle of Control Activity: Prepares cash count sheet
Documents procedures
