Spiceland Chapter 4_Solutions

Spiceland Chapter 4_Solutions - Chapter 04 - Cash and...

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Chapter 04 - Cash and Internal Controls Occupational fraud is the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources. Occupational fraud occurs through theft or misuse of the company’s resources and through financial statement manipulation. Internal control is a company’s plan to (1) safeguard the company’s assets and (2) improve the accuracy and reliability of accounting information. Effective internal control builds a wall to prevent misuse of company funds by employees and fraudulent or errant financial reporting. Strong internal control systems allow greater reliance by investors on reported financial statements. Managers are entrusted with the resources of both the company’s lenders (liabilities) and owners (stockholders' equity). They have an ethical responsibility to appropriately use and accurately report the company’s funds. Managers are motivated to manipulate financial statements to maximize their compensation, increase the company’s stock price, and preserve their job. Fraudulent financial reporting by managers can eventually lead to bankruptcy, resulting in employee termination, reduced salaries and increased workloads for those who are left, and loss of employee retirement funds, stock options, and health benefits. The major provisions of the Sarbanes-Oxley Act include the Public Company Accounting Oversight Board, corporate executive accountability, limitation on nonaudit services, retention of work papers, auditor rotation, restrictions related to conflicts of interest, audit committee hires the auditor, and documentation of internal control. 4-1 Chapter 4 – Homework Solutions Cash and Internal Controls REVIEW QUESTIONS Question 4-1 Question 4-2 Question 4-3 Question 4-4 Question 4-5 Question 4-6
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Chapter 04 - Cash and Internal Controls Answers to Review Questions (continued) 1. Control Environment – The overall ethical tone of the company with respect to internal control. 2. Risk Assessment – Identification and analysis of internal and external risk factors that could prevent a company’s objectives from being achieved. 3. Control Activities – The policies and procedures that help ensure that management’s directives are being carried out. 4. Monitoring – Continuous observation of the internal control system. 5. Information and Communication – Systems designed to ensure accurate measurement of business transactions and reliability of financial reports. Detective controls are designed to detect errors or fraud that have already occurred, while preventive controls are designed to keep errors or fraud from occurring in the first place. Authorizing transactions, recording transactions, and maintaining control of the
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Spiceland Chapter 4_Solutions - Chapter 04 - Cash and...

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