Midterms

Question 1

refers to the processes, policies, and procedures implemented by an organization to ensure the integrity of financial and accounting information, promote operational efficiency, and comply with laws and regulations. It helps prevent fraud, errors, and inefficiencies while ensuring that an organization’s objectives are met effectively.
The purpose of this is to provide reasonable assurance that an organization’s objectives

Answer 1

Internal control

Question 2

The purpose of internal control is to provide reasonable assurance that an organization’s objectives are achieved in the following areas:

Answer 2

1. Operational Efficiency and Effectiveness
2. Reliability of Financial Reporting
3. Compliance with Laws and Regulations
4. Safeguarding of Assets
5. Risk Management and Fraud Prevention

Question 3

Internal controls do not eliminate all risks but instead provide this that means an organization operates effectively, remains compliant, and protects its resources.

Answer 3

Reasonable assurance

Question 4

 Ensures business operations run smoothly and resources are used efficiently.
 Helps prevent waste, inefficiencies, and operational disruptions.

Answer 4

Operational Efficiency and Effectiveness

Question 5

 Ensures financial statements are accurate, complete, and prepared in accordance with applicable accounting standards.
 Reduces the risk of errors, fraud, and misstatements in financial reports

Answer 5

Reliability of Financial Reporting

Question 6

 Helps organizations comply with legal and regulatory requirements.
 Reduces the risk of penalties, fines, and reputational damage.

Answer 6

Compliance with Laws and Regulations

Question 7

 Protects physical, financial, and intellectual assets from theft, fraud, misuse, or unauthorized access.
 Includes security measures like segregation of duties, access controls, and inventory management.

Answer 7

Safeguarding of Assets

Question 8

 Identifies, assesses, and mitigates risks that could harm the organization.
 Helps prevent and detect fraud, ensuring ethical business practices.

Answer 8

Risk Management and Fraud Prevention

Question 9

Elements of Internal Control

Answer 9

1. Control Environment
2. Risk Assessment process
3. Control Activities
4. Information & Communication System
5. Monitoring Activities

Question 10

serves as the foundation for an organization’s internal control system. Its primary purpose is to establish a culture of integrity, accountability, and compliance, ensuring that all employees understand and follow internal control policies

Answer 10

Control Environment

Question 11

It fosters trust, accountability, and ethical behavior within an organization, reducing fraud risk and ope

Answer 11

Strong control Environment

Question 12

Who is Responsible for the Control Environment?

Answer 12

*top management
*the board of directors
*those in governance roles.

Question 13

It is a critical element of internal control, as outlined in frameworks like COSO (Committee of Sponsoring Organizations of the Treadway Commission). It involves identifying, analyzing, and responding to risks that could affect the achievement of business objectives. This process helps ensure that an organization can detect potential threats and implement controls to mitigate them.

Answer 13

risk assessment process

Question 14

are a fundamental component of internal control, as defined by frameworks like COSO. They consist of policies, procedures, and mechanisms designed to ensure that management’s directives are carried out and risks are mitigated. Their primary purpose is to prevent and detect errors, fraud, and inefficiencies, thereby supporting the achievement of an organization’s objectives.

Answer 14

Control activities

Question 15

The major categories of control procedures are

Answer 15

:A. Performance Review
B. Information Processing Controls
1) Proper authorization of transactions and activities
2) Segregation of duties
3) Adequate documents and records
4) Safeguards over access to assets, and
5) Independent checks on performance
C. Physical controls

Question 16

It is when a management uses accounting and operating data to assess performance, and it then takes corrective action.

Answer 16

Performance Review

Question 17

are policies and procedures designed to require authorization of transactions and to ensure the accuracy and completeness of transaction processing.

Answer 17

Information processing controls

Question 18

Intended to prevent theft of its are relevant to the reliability of financial statement preparation, and therefore the audit, depends on circumstances such as when assets are highly susceptible to misappropriation.

Answer 18

physical controls

Question 19

They ensure that relevant, timely, and accurate information flows throughout an organization, enabling effective decision-making and risk management.

Answer 19

Information and communication system

Question 20

are a crucial component of internal control, ensuring that controls function effectively over time. The COSO Internal Control Framework defines monitoring as the process of evaluating and assessing internal controls to ensure they are working as intended and addressing risks appropriately.

Answer 20

Monitoring Activities

Question 21

Is an intentional act involving the use of deception that results in a material misstatement of the financial statements.

Answer 21

Fraud

Question 22

TYPES OF MISSTATEMENTS

Answer 22

a. Misstatements arising front misappropriation of assets
b. Misstatements arising from fraudulent financial reporting

Question 23

Occurs when a perpetrator steals or misuses an organization’s assets. A dominant fraud scheme perpetrated against small business and the perpetrators are usually employees. It can be accomplished in various ways, including embezzling cash receipts, stealing assets, or causing the company to pay for goods or services that were not received.

Answer 23

Asset misappropriation

Question 24

It is the intentional manipulation of reported financial results to misstate the economic condition of the organization. The perpetrator of such a fraud generally seeks gain through the rise in stock price and the commensurate increase in personal wealth. Sometimes the perpetrator does not seek direct personal gain, but instead uses the fraudulent financial reporting to “help” the organization avoid bankruptcy or to avoid some other negative financial outcome

Answer 24

Misstatements arising from Fraudulent Financial Reporting

Question 25

The Fraud triangle

Answer 25

Incentives/Pressure Opportunities Rationalization

Question 26

 Personal factors, such as severe financial considerations  Pressure from family, friends, or the culture to live a more lavish lifestyle than one's personal earnings allow for  Addictions to gambling or drugs

Answer 26

Incentives relating to asset misappropriation

Question 27

 Management compensation schemes  Other financial pressures for either improved earnings or an improved balance sheet  Debt covenants  Pending retirement or stock option expirations  Personal wealth tied to either financial results or survival of the company  Greed-- for example, the backdating of stock options was performed by individuals who already had millions of pesos of wealth through stock

Answer 27

incentives relating to fraudulent financial reporting

Question 28

One of the most fundamental and consistent findings in fraud research is that there must be an opportunity for fraud to be committed. Although things may sound obvious that is, "everyone has an opportunity to commit fraud really conveys much more. It means not only that an opportunity exists, but either there is a lack of controls or the complexities associated with a transaction are such that the perpetrator assesses the risk of being caught as low.

Answer 28

Opportunities to Commit Fraud

Question 29

Personal rationalizations often revolve around mistreatment by the company or a sense of entitlement (such as, "the company owes me!") by the individual perpetrating the fraud.

Answer 29

Rationalizing the Fraud for asset misappropriation

Question 30

The rationalization can range from "saving the company" to personal greed.  This is one-time thing to get us through the current crisis and survive until things get better.  Everybody cheats on the financial statements a little; we are just playing the same game.  We will be in violation of all of our debt covenants unless we find a way to get this debt off the financial statements.  We need a higher stock price to acquire company XYZ, or to keep our employees through stock options, and so forth.

Answer 30

For fraudulent financial reporting

Question 31

While businesses in different individuals can have striking different characteristics most have some fundamental conceptual characteristics are practices in common. The three basic business transaction cycles include:

Answer 31

1. Sales and Collections Cycle 2. Acquisitions and Payments Cycle 3. Payroll and Personnel Cycle

Question 32

2 Sales and collection cyles

Answer 32

1. Errors in recording sales and collection transaction 2. Fraud in sales and collections

Question 33

include mechanical errors, such as using a wrong piece or wrong quantity, recording sales in the wrong period (Cutoff errors), a bookkeeper's failure to understand proper accounting for a transaction, and so on. Internal controls are designed to prevent or detect many of these kinds of errors.

Answer 33

Errors in recording sales and collection transaction

Question 34

Frauds in sales generally relate to fraudulent financial reporting. In contrast, frauds in cash collections relate to misappropriation of assets, typically accomplished by clerks or management-level employees.

Answer 34

Fraud in sales and collections

Question 35

involving sales typically results in overstated sales or understated sales returns and allowances. Managers under pressure to achieve high profits may inflate sales to meet target profits established by senior managers, to obtain bonuses, to retain the respect of senior managers, or even to keep their jobs.

Answer 35

Fraudulent financial reporting

Question 37

3 Misappropriation of Assets: Withholding Cash Receipts

Answer 37

1. Skimming 2. Lapping 3. Kiting

Question 38

This refers to the act of withholding cash receipts without recording them. An example is when a cashier in a retail store does not ring up a transaction and takes the cash. Another example is when an employee who has access to cash receipts and maintains accounts receivable records can record a sale at an amount tower than the invoice amount. When the customer pays, the employee takes the difference between the invoice and the amount recorded as a receivable. Detection of unrecorded cash receipts is very difficult; however, unexplained changes in the gross profit percentage or sales volume may indicate that cash receipts have been withheld

Answer 38

Skimming

Question 39

This technique is used to conceal the fact that cash has been abstracted; the shortage in one customer's account is covered with a subsequent payment made by another customer. An employee who has access to cash receipts and maintains accounts receivable can engage in lapping. Routine testing of details of collections compared with validated bank deposit slips should uncover this fraud.

Answer 39

Lapping

Question 40

This is another technique used to cover cash shortage or to inflate cash balance. Involves counting the cash twice by using the float in the banking system. (Float is the gap between the time the check is deposited or added to an account and the time the check clears or is deducted from the account it was written on). Analyzing and verifying cash transfers during the days surrounding year-end should reveal this type of fraud.

Answer 40

Kiting

Question 41

Acquisition and Payments Cycle

Answer 41

1. Errors in the Acquisitions and Payments Cycle 2. Frauds in the Acquisitions and Payments Cycle

Question 42

 Failing to record a purchase in the proper period (cutoff errors)  Recording goods accepted on consignment as a purchase  Misclassifying purchases of assets and expenses  Failing to record a cash payment  Recording payment twice  Failing to record prepaid expenses as assets

Answer 42

Errors in the acquisition and payment cycle

Question 43

This involves the perpetrator creating a fictitious invoice (and sometimes a receiving report, purchase order and so forth) and processing the invoice for payment. Alternatively, the perpetrator can pay the invoice twice.

Answer 43

Paying for Fictitious Purchases

Question 44

This scheme, a purchasing agent may agree with a vendor to receive a kickback (refund payable to the purchasing person on goods or services acquired from the vendor). This is usually done in return for the agent's ensuring that the particular vendor receives an order from the firm. Often a check is made payable to the purchasing agent and mailed to the agent at a location other than his or her place of employment. Sometimes the purchasing agent splits the kickback with the vendor's employee tor approving and payıng it. Detecting kickbacks is difficult because the buyer's records do not reflect their existence. However, when vendors are required to submit bids for goods or services, the likelihood of kickbacks is reduced.

Answer 44

Receiving Kickbacks

Question 45

Goods or services for personal use may be purchased by executive or purchasing agents and charged to the company's account. To execute such a purchase, the perpetrator must have access to blank receiving reports and purchase approvals or must connive with another employee. Fraud involving the purchase of goods for personal uses more likely to go unnoticed when perpetual records are not maintained.

Answer 45

Purchasing Goods for Personal Use

Question 46

Adding them to the payroll is one of the most common defalcations. Detecting fictitious employees on the payroll is very difficult; but auditors do sometimes perform a Surprise payoff as a deterrent to this form of defalcation. Alternatively, the auditor may turn the check distribution over to an official not associated with preparing payroll, signing checks, or supervising workers. Personnel files and the employees' completed time cards and time tickets may also be examined to substantiate the existence of absent employees.

Answer 46

Fictitious Employees

Question 47

Increasing the rate above that approved or paying employees for more hours than they worked are the most common ways of paying employees more than they are entitled to receive. These practices can be substantially reduced by requiring personnel department officials to authorize changes in pay rates and by monitoring total hours worked and paid for. Analytical procedures that focus on cost per unit of actual production can also be helpful in detecting excess payments to employees.

Answer 47

Excess Payments to Employees

Question 48

Companies having difficulty meeting profit targets or not-for- profit entities having difficulty managing costs and expenses might fail to record a payroll. The omission of payroll can be difficult to hide unless a similar amount of revenues or receipts has been omitted. Analytical procedures can be performed to test the reasonableness of payroll cost.

Answer 48

Failure to Record Payroll

Question 49

A company having difficulty meeting profit targets might assign to inventory labor cost that should have been charged to expense. Analytical procedures such as comparing costs incurred to budgeted cost and verification of valuation of inventory are some of the useful techniques in detecting such fraud.

Answer 49

Inappropriate Assignment of Labor Costs to Inventory