Chapter Seven


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FRAUD, INTERNAL CONTROL, CASH CHAPTER 7 FRAUD : dishonest act by an employee that results in personal benefits to the employee at a cost to the employer. OPPORTUNITY - The workplace environment providing opportunities to allow employee(s) to take advantage. - Workplace lacks sufficient controls to deter and detect fraud. FINANCIAL PRESSURE - Employees often commit fraud because of personal financial problems such as too much debt or need to lead a lifestyle beyond their current salary. RATIONALIZATION - To justify fraud, employees rationalize their dishonest acts. - Employees feel justified in stealing because they believe they deserve to be paid more. SARBANES-OXLEY ACT ( SOX of 2002) - Companies to pay attention to internal control. - Corporate executives and boards of directors to ensure that internal controls are reliable and effective. - Sound principles of control over financial reporting. - Continual assessment to ensure that controls are working. INTERNAL CONTROL consists all of the safeguard s its assets from employee theft, robbery, and unauthorized use. - Enhances the accuracy and reliability of its accounting records by reducing the risk of errors (unintentional mistakes) and irregularities (intentional mistakes and misrepresentations) in the accounting process. - Increase efficiency of operations. - Ensure compliance with laws and regulations. INTERNAL CONTROL SYSTEMS - Control Environment o Top management must make it clear that the organization values integrity and unethical activity will not be tolerated. - Risk assessment o The company must identify and analyze the factors that create risk and determine how to manage these risks. - Control activities o Management must design policies and procedures to address risks. - Information and communication o The system must capture and communicate all pertinent information to appropriate parties. - Monitoring o The system must be monitored periodically to assess its adequacy. PRINCIPLES OF INTERNAL CONTROL ACTIVITIES
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FRAUD, INTERNAL CONTROL, CASH CHAPTER 7 - Control activities are the backbone of the company’s efforts to address risk of fraud. To advance risk of fraud, to safeguard its assets, and enhance accuracy of the company they follow SIX principles. o ESTABLISHMENT OF RESPONSIBILTY Control is most effective when only one person is responsible for a given task. Establishing responsibility often requires limiting access only to authorized personnel, and then identifying those personnel. o SEGREGATION OF DUTIES The responsibility for related activities should be assigned to different individuals. Assign related activities to different individuals to decrease the potential for errors and irregularities. The responsibility for keeping the records for an asset should be separate from the physical custody of that
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This note was uploaded on 10/18/2010 for the course ACCT 210 taught by Professor Degaetano during the Fall '10 term at Montclair.

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