Warren SM_Ch.08_final


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499 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 fi- nancial scandals of the early 2000s that caused stockholders, creditors, and oth- er investors to lose millions and in some cases billions of dollars. b. The purpose of Sarbanes-Oxley is to restore public confidence and trust in the financial statements of companies. 2. Internal control is broadly defined as the procedures and processes used by a com- pany to safeguard its assets, process infor- mation 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 competitive threats, regulatory changes, and changes in economic factors. Control procedures are established to provide reasonable assurance that business goals will be achieved. Moni- toring is the evaluation of the internal control system. Information and com- munication 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 pro- vides information for management’s use in conducting the affairs of the business and in reporting to owners, creditors, 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 another’s job at a later date tends to discou- rage 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 individ- ual 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 automati- cally 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). 7.
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