Internal controls system and fraud Flashcards
(23 cards)
What are the effects of a good internal control system?
Serious errors and or missing items in the financial statements is unlikely
Risk of fraud is low
Business can operate smoothly and efficiently
The assets of the business are protected
Business will comply with laws and regs
Who’s responsibility is it to ensure that there are strong internal controls in place?
Senior Management
What are the key aspects of internal controls for a smaller business?
Little segregation of duties - owner needs to be more aware for fraud
More epmphasis on individuals authorisation and management rather than policies and procedures
Name 8 different types of controls:
Segregation
Organisation
Authorisation
Physical
Supervision
Personnel
Arithmetical and accounting
Management
How can a company with strong internal control systems ensure ethical standards are maintained?
Clear communication of the ethical values to all employees
Competent, qualified staff who will comply with porfessional standards
Directors and managers who follow relevant rules and regulations behave professionally
Decisions being made using set authorisation limits will be carried out in an objective, unbiased manner
Name some possible defficiencies within an accounting system?
Lack of controls in the system
Poor implementation of controls
Lack of monitoring of controls
Lack of leadership
Why may a lack of controls in an accounting system occur?
Poorly designed system, with few controls within it.
Lack of qualified, experienced staff to design appropriate controls.
The business has grown from a small business, and with no changes to the accounting systems, and the owner is no longer able to control it sufficiently
How may poor implentation of controls occur?
Staff have left the business and new staff have not been trained in the importance of the control procedures properly.
Unqualified, incompetent staff may not realise the importance of having controls, so prepare information separately from the accounting system.
Controls are not integrated into daily, weekly or monthly procedures, so are forgotten about.
Why may lack of monitoring occur?
Staff are ‘too busy’ to undertake a review of controls, such as inventory counts, due to under-staffing.
Senior staff are unaware of the importance of monitoring.
Senior management ‘trust’ the staff to do their job properly, so monitoring is considered unnecessary
How may a lack of leadership occur?
The owners are too busy running the business to spend time focusing on whether systems are working properly
The finance function is located separately to the rest of the business and management
What problems can weaknesses in the internal controls system lead to?
Errors being made because people do not know the correct way of doing things.
Errors being made and not being picked up because the processes are not being checked properly.
Fraud being committed because the internal control system is deficient and the opportunity for fraud is there for the taking.
What is the definition of fraud?
The use of deception with the intention of obtaining an advantage, avoiding an obligation or causing loss to someone else or to an organisation.
What are the three elements to the fraud triangle?
Oppotunity
Motivation
Rationalisation
Explain the term opportunity in the fraud triangle?
Where there are existing, or new, weaknesses in control systems, employees may identify ways to commit fraud.
For example: lower staffing levels means reducwed segregation of duties.
Explain the term motivation in the fraud triangle?
An employee may be motivated to commit fraud due to financial pressures they have, or by incentives, such as bonuses.
There may be situations where staff believe their job is at risk if they do not achieve certain targets, which causes them to falsify data or test results.
Explain the term rationalisation in the fraud triangle?
An employee who commits fraud, will want to be able to justify why they do it.
Their justification might be that they feel unfairly treated by the
organisation they work in, over-worked, and/or underpaid.
They may also justify it if they believe that other employees are committing fraud, particularly management.
What is the managements responsibility regarding fraud?
Identify areas where the risk of fraud exists and to grade the seriousness of the risk in each case
Set up control systems involving all staff to alert management to the possible occurrence of fraud
Monitor those control systems on a regular basis to ensure that they are working
Deal with any incidence of fraud in an appropriate way, whether it be a formal warning or calling in the police
Name some techniques which can be used for making an internal control system fraud resistant?
Fraud Staff - employees hired purely for fraud prevention
Management Responsibility - managers given a different areas of responsibility to ensure fraud is minimal
Management Supervision - management sense checking accounting activities
Segregation of duties - Linked areas of a process delegated to different people
Lock and Key - Physical security
Authorisation - Some activities require authorisation by a senior member
How can fraud be detected?
Employees acting suspiciously
Employees with a higher level of spending than usual
Employees working longer hours or taking less holiday
Employees who are known to be short of money
Employees who have a grudge against the organisation
Explain the different likelihood’s of risks?
High - the likelihood of fraud is at a high level (disappearing pens)
Medium - The likelihood is possible (theft of cash)
Low - The likelihood is remote (removal of assets)
Explain the different impacts of fraud?
High - the effects of fraud are very serious for the organisation
Medium - The effects of the fraud are significant but can be dealt with internally
Low - the impact of the fraud is insignificant
What is classed as a misappropriation of funds?
Loss of time
Loss of inventory
Loss of money
What are the two categories under the phrase ‘misstatement of the financial statements’?
One-off misstatement - Not recording liabilities to keep gearing low
Continuing misstatement over time - Increasing the value of closing inventory to show increasing profits
