Exam 2 Review.docx - Chapter 6 Cash Fraud and Internal...

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Chapter 6: Cash, Fraud, and Internal Control Internal Control - Managers use an internal control system to monitor and control business activities - Internal control system is policies and procedures used to: o Protect assets o Ensure reliable accounting o Uphold company policies o Promote efficient operations - The principles of internal control are to: o Establish responsibilities Tasks should be clearly established Tasks should be assigned to one person Can then determine who is at fault o Maintain adequate records Good recordkeeping helps protect assets and helps managers monitor company activities Includes: Detailed records Use of chart of accounts Preprinted forms Prenumbered sales slips Computerized point-of-sale systems o Insure assets and bond key employees Assets should be insured against losses Employees handing a lot of cash and other assets should be bonded An employee is bonded when a company purchases an insurance policy, or a bond, against theft by that employee Bonding discourages theft because bonded employees know the bonding company will pursue reported theft o Separate recordkeeping from custody of assets A person who controls or has access to any assets must not have access to that asset’s accounting records This reduces the risk of theft or waste of an asset because the person with control over it knows that another person keep it’s records A recordkeeper who does not have access to the asset has no reason to falsify records which means to steal an asset and hide the theft from the records, 2 or more people must agree in secret to commit fraud o Divide responsibility for related transactions Responsibility for a transaction should be divides between 2 or more people This ensures the work of one person acts as a check on the other to prevent fraud and errors This principle is called separation of duties o Apply technological controls
Cash registers, time clocks, and ID scanners are examples of devices that can improve internal control Cash registers make an electronic file/record of each sale Time clock records exact time employee works Personal scanners limit access to authorized individuals o Perform regular and independent reviews Regular reviews of internal control help ensure that procedures are followed Reviews are preferably done by auditors not directly involved in the activities Auditors evaluate the efficiency and effectiveness of internal controls Sarbanes-Oxley Act (SOX) - Requires manages and auditors of companies whose stock is traded on an exchange (called public companies) to document and verify the system of internal controls - Some of the requirements are: o The company must have effective internal controls o Auditors must evaluate internal controls o Violators receive harsh penalties up to 25 years in prison with fines o Auditors’ work is overseen by Public Company Accounting Oversight Board (PCAOB) Committee of Sponsoring Organizations (COSO) -

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