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CH7+Internal+Control+Operations+and+Cash+09F (1)

CH7+Internal+Control+Operations+and+Cash+09F (1) - Chapter...

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Chapter 7-1 ACCT 207—Chapter 7 Internal Control Operations and Cash I. Internal control refers to the safeguards the organization builds within their own system of recording. A. Five purposes of internal control. 1. To provide reliable data 2. To safeguard the assets and records 3. To help provide for the efficiency and effectiveness of operations 4. To ensure management policies are followed 5. To ensure compliance with governmental mandates. B. Due to the collapse of numerous companies (e.g., Enron, WorldCom, etc.), the U.S. Congress, along with the SEC, will be reviewing the corporate structure of U.S. Corporations. New laws are expected. 1. The Foreign Corrupt Practices Act of 1977 requires publicly traded companies to have system of internal controls in place. These companies are required to have a statement of management’s responsibility for implementing good internal controls. 2. Sarbanes – Oxley Act of 2002 in response to Worldcom, Enron, etc. It is the most far reaching business legislation since the Anti-Trust Laws of the 1930's. They desperately want to restore the public trust by reducing unethical corporate behavior. SOX impact: Senior executive mgt. must certify financial statements—penalties include jail time. Enterprises must have a Statement of Ethics which includes how infractions should be reported (hot-line, audit committee, etc.). Senior management must make assertions regarding system of internal control. Internal controls must be reliable and effective. Thus, they are under constant review. Increased independence of outside auditors. Increased responsibility of board of directors. As a result all managers will need basic internal controls training and will be held accountable. CPA firms experienced a 65% increase in client hours. Client businesses are spending significantly more time preparing for audit.
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Chapter 7-2 C. Fraud triangle. Three main activities contribute to fraud.
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