Chapter_8_Homework_Solutions

Chapter_8_Homework_Solutions - CHAPTER 8 SARBANES-OXLEY,...

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Unformatted text preview: CHAPTER 8 SARBANES-OXLEY, INTERNAL CONTROL, AND CASH EYE OPENERS 1. a. Congress passed the Sarbanes-Oxley Act of 2002 because of the Enron, Worldcom, Tyco, Adelphia, and other financial scandals of the early 2000s that caused stockholders, creditors, and other investors to lose millions and in some cases billions of dollars. b. The purpose of Sarbanes-Oxley is to re- store public confidence and trust in the financial statements of companies. 2. Internal control is broadly defined as the pro- cedures and processes used by a company to safeguard its assets, process information accurately, and ensure compliance with laws and regulations. 3. a. The five elements of internal control are the control environment, risk assess- ment, control procedures, monitoring, and information and communication. The control environment is the overall attitude of management and employees about the importance of controls. Risk assessment includes evaluating various risks facing the business, including com- petitive threats, regulatory changes, and changes in economic factors. Control procedures are established to provide reasonable assurance that busi- ness goals will be achieved. Monitoring is the evaluation of the internal control system. Information and communication provide management with feedback about internal control. b. No. One element of internal control is not more important than another element. All five elements are necessary for effective internal control. The accounting system is an information system because it provides information for managements use in conducting the affairs of the busi- ness and in reporting to owners, credit- ors, and other stakeholders. It includes the entire network of communications used by the business. 4. The knowledge that job rotation is practiced and that one employee may perform anothers job at a later date tends to discour- age deviations from prescribed procedures. Also, rotation helps to disclose any irregular- ities that may occur. 5. Authorizing complete control over a se- quence of related operations by one indi- vidual presents opportunities for inefficiency, errors, and fraud. The control over a sequence of operations should be divided so that the work of each employee is automat- ically checked by another employee in the normal course of work. A system functioning in this manner helps prevent errors and inef- ficiency. Fraud is unlikely without collusion between two or more employees. 6. To reduce the possibility of errors and em- bezzlement, the functions of operations and accounting should be separated. Thus, one employee should not be responsible for handling cash receipts (operations) and maintaining the accounts receivable records (accounting)....
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This note was uploaded on 11/29/2010 for the course ACC 1101 taught by Professor King during the Spring '10 term at University of West Georgia.

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Chapter_8_Homework_Solutions - CHAPTER 8 SARBANES-OXLEY,...

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