Accounting Final Exam.docx - Accounting Final Exam Chapter 4 Internal Controls Companies issue incorrect financial statements for two reasons 1 Errors

Accounting Final Exam.docx - Accounting Final Exam Chapter...

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Accounting Final Exam Chapter 4: Internal Controls Companies issue incorrect financial statements for two reasons: 1. Errors : sometimes companies make accidental errors in recording (or failing to record) transactions or in applying accounting rules. 2. Fraud : occurs when a person intentionally deceives another person for personal gain or damage that person Occupational Fraud : the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employer’s resources. 1. Misuse of Company Resources 2. Financial Statement Manipulation Fraud Triangle : The three elements present for every fraud: 1. Opportunity : the situation allows the fraud to occur 2. Motivation : someone feels the need to commit fraud, such as the need for money 3. Rationalization : justification for the deceptive act by the one committing the fraud Internal Controls : a company’s plans to (1) safeguard the company’s assets and (2) improve the accuracy and reliability of accounting information Sarbanes-Oxley Act : known as the Public Company Accounting Reform and Protection Act of 2002 and commonly referred to as SOX; the act established a variety of guidelines related to auditor-client relations and internal control procedures SOX applies to all companies that are required to file financial statements with the SEC and represent one of the greatest reforms in business practices in U.S. history Established a variety of guidelines related to auditor-client relations and internal control procedures Components of Internal Controls: 1. Monitoring: continual monitoring of internal activities and reporting of deficiencies is required. a. Includes formal procedures for reporting control deficiencies 2. Control Activities : are the policies and procedures that help ensure that management’s directives are being carried out a. Include authorizations, reconciliations, and separation of duties 3. Risk Assessment : identifies and analyzes internal and external risk factors that could prevent a company’s objectives from being achieved 4. Control Environment : sets the overall ethical tone of the company with respect to internal control a. Includes formal policies related to management’s philosophy, assignment of responsibilities, and organizational structure
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Examples of Preventive Controls Include : 1. Separation of duties : Authorizing transactions, recording transactions, and controlling related assets should be separated among employees a. Ex: The person selling the movie ticket should not also be the employee in charge of collecting the tickets 2. Physical Control : over assets and accounting records. a. Each night, money from ticket sales should be placed in the theatre’s safe or deposited at the bank. b. Passwords should be updated daily 3. Proper Authorization : to prevent improper use of the company’s resources a. The theatre should establish formal guidelines on how to handle cash receipts and make purchases 4. Employee Management : the company should provide employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties.
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