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Unformatted text preview: ACCOUNTING MIDTERM 2 STUDY GUIDE CHAPTER 7 Fraud- a dishonest act by an employee that results in personal benefits to the employee at a cost to the employer Fraud Triangle • Opportunity the workplace environment must provide opportunities that an employee can exploit (most important element) • Financial pressure personal financial problems caused by too much debt or they want to lead a lifestyle that they cannot afford • Rationalization rationalize their dishonest actions Sarbanes-Oxley Act of 2002 Internal control- consists of all the related methods and measures adopted within an organization to safeguard its assets, enhance the reliability of its accounting records, increase efficiency of operations, and ensure compliance with laws and regulations. Five primary components include: • A control environment • Risk assessment • Control activities • Information and communication • Monitoring Principles of Internal Control • Establishment of Responsibility o One person is responsible for a given task o Limiting access to authorized personnel and then identifying those personnel o Many companies use identifying pass codes • Segregation of Duties o Different individuals should be responsible for related activities o The responsibility for record-keeping for an asset should be separate from the physical custody of that asset • Documentation Procedures o Provide evidence that transactions and events have occurred o Use prenumbered documents and all documents should be accounted for o Employees should promptly forward source documents for accounting entries to the accounting department to ensure timely recording of transactions • Physical controls o Relate to the safeguarding of assets and enhance accuracy and reliability of the accounting records Safes, vaults, locked warehouses, alarms, etc. • Independent Internal Verification o Companies should verify records periodically or on a surprise basis o An employee who is independent of the personnel responsible for the information should make the verification o Discrepancies and exceptions should be reported to a management level that can take appropriate corrective action o Internal Auditors- company employees who continuously evaluate the effectiveness of the company’s internal control systems • Human Resource Controls o Bond employees who handle cash Bonding- involves obtaining insurance protection against theft by employees o Rotate employees’ duties and require employees to take vacations o Conduct thorough background checks Limitations of Internal Controls • The human element • Collusion o Two or more individuals may work together to get around prescribed controls • Reasonable assurance o Rests on the premise that the costs of establishing control procedures should not exceed their expected benefits o Example hiring a security guard to stand outside of a store may be more expensive than the benefits are Voucher System- a network of approvals by authorized individuals, acting...
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This note was uploaded on 02/02/2012 for the course ACCT I S 100 taught by Professor Kopsy during the Fall '11 term at University of Wisconsin Colleges Online.
- Fall '11