exam 2 review answers - Chapter 5 The fraud triangle&...

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Chapter 5 The fraud triangle & The Sarbanes Oxley Act: what is the purpose of the SOX Act and what rules did it put in place; Exhibit 5.2 o Sarbanes Oxley Act: In response to huge company fraud SOX Triangle: 1. Counteract incentives: o Stiffer fines o Stiffer prison terms 2. Reduce opportunity: (most effected by SOX) o Public companies must establish an audit committee of independent directors o Must evaluate and report on effectiveness of internal control over finance reporting 3. Encourage honesty: o anonymous tip lines o whistle blower protection o codes of ethics o Fraud triangle: 1. Incentive reason why they are committing fraud ex: job security, increase personal wealth, larger paycheck 2. Opportunity: stems from weak internal controls 3. Rationalization: personal characteristics that allow them to see action as justified or unavoidable personal entitlement outweighs moral principals Internal controls: definition, purpose, and principles; limitations: Exhibit 5.3 & 5.4 M5, M7, E1, E2, E3, E4, CP1, PA1, PB1 o Definition: Actions taken by people at every level of an organization to achieve their objective o Purpose: 1. Operational objectives: focus on… completing work efficiently and effectively protecting assets by reducing the risk of fraud 2. Reporting objectives: include… producing reliable/timely accounting info o to be used by people internally and externally to organization 3. Compliance objectives: focus on… adhering to laws and regulations o Objectives: (use followings control components as framework when analyzing their internal control system)
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1. Control environment: attitude people in organization hold regarding internal control influenced by board of directors/senior manager’s….. o 1. policies o 2. Demonstrated commitment to integrity/ethical values o 3. Character of the people they hire o 4. How they evaluate others Strong internal environment: helps employees understand the value of internal controls to organization’s success 2. Risk assessment: managers should always assess potential for fraud/other risks that could prevent company from completing objectives 3. Control activities: include work responsibilities completed by employees to reduce risk to an acceptable level 4. Information and communication: must generate and communicate info about activities affecting organization to support good decision making 5. Monitoring activities: o Principles: 1. Establish Responsibility:
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