Review Questions 7 8 9.docx - Chapter 7,8,9 Review...

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Chapter 7,8,9 Review Questions Chapter 7 1) Internal control is the organizational plan and all the related measures designed to accomplish the safeguard of assets, encourage employees to follow company policies, promote operational efficiency and ensure accurate a reliable accounting records. 2) Sarbanes-Oxley Act requires companies to review internal control and take responsibility for the accuracy of the financial statements. 3) The first and most important component is Internal Control Procedures. This ensures that the business’s goals are achieved. This is done through a good separation of duties, having an ethical and reliable staff, etc. The next one is Risk Assessment. This is important as well as companies must identify their risks that can get them towards bankruptcy. In difficulties, they tend to falsify their financial reports and this illegal thing should be avoided. The business’s risk should be assessed and the higher the risk, the more controls a company must put in place to safeguard its assets and accounting records. Monitoring of controls is another important component that ensures that the company is following the legal requirements of safeguarding the assets and employees are following company’s policies and presenting fair financial reports. This is a process which is done by two type of auditors: internal and external. 4) Internal auditors are employees that control the operational efficiency and employees, and external auditor is an independent accountant who ensures that the company is presenting fair financial reports, in accordance with GAAP. 5) Separation of duties is the division of responsibilities between two or more people to limit fraud and promote accuracy of accounting records. 6) Two major techniques commonly used to protect companies in the e-commerce area are encryption and firewall. Encryption rearranges plain-text messages by a mathematical process and it cannot be read by those who don’t know the code. Firewalls limit access into a local network and only members can access the network. These techniques help e- commerce companies to protect themselves from hackers, viruses, Trojans and phishing expeditions. 7) Collusion is an act that is part of limitations of internal control. Internal control can be overcome if two or more people work together to steal from a business. Another limitation is the cost issue. Businesses have to ask themselves if an employee that has to watch a store, is worth the cost in relation to the theft he prevents. 8) Cash receipts over the counter involves emptying the drawer once or several times a day and requiring to put a transaction to open the drawer. Then, a manager compares the sale receipts with the amount of cash in the register and then deposits those money to the bank. Also, the receipts recorded go to the accounting department to record the journal entries needed.

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