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Lecture 7

ACG 2021 Lecture 7: ACG Chapter 7 Notes
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3 Pages
12 Views
Spring 2017

Department
Accounting
Course Code
ACG-2021
Professor
Paterson
Lecture
7

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Chapter 7 Notes
- Fraud and Internal Control
o Fraud
Dishonest act by an employee that results in personal benefit to the
employee at a cost to the employer
Three factors that contribute to fraudulent activity
Opportunity
Financial Pressure
Rationalization
o The Sarbanes-Oxley Act (SOX)
Applies to publicly traded US corporations
Required to maintain a system of internal control with the help of
internal auditors who also monitor its effectiveness continuously
Corporate executives and board of directors must ensure that these
controls are reliable and effective
Independent outside auditors must attest to the adequacy of the internal
control system
SOX created the Public Company Accounting Oversight Board (PCAOB)
o Internal Control
Methods and measures adopted to:
1. Safeguard assets
2. Enhance accuracy and reliability of accounting records
3. Increase efficiency of operations
4. Ensure compliance with laws and regulations
A opay’s iteal auditos ae eployees ho ealuate the
effetieess of thei opay’s internal controls
o Principles of Internal Control Activities
Establishment of Responsibility
Control is most effective when only one person is responsible for
a given task
Establishing responsibility often requires limiting access only to
authorized personnel, and then identifying those personnel
Segregation of Duties
Different individuals should be responsible for related activities
The responsibility for record keeping for an asset should be
separate from the physical custody of that asset
Segregation of Related Activities
When one individual is responsible for all of the related activities,
the potential for errors and irregularities is increased
Related purchasing activities should be assigned to different
individuals
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Description
Chapter 7 Notes - Fraud and Internal Control o Fraud ▪ Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer ▪ Three factors that contribute to fraudulent activity • Opportunity • Financial Pressure • Rationalization o The Sarbanes-Oxley Act (SOX) ▪ Applies to publicly traded US corporations ▪ Required to maintain a system of internal control with the help of internal auditors who also monitor its effectiveness continuously ▪ Corporate executives and board of directors must ensure that these controls are reliable and effective ▪ Independent outside auditors must attest to the adequacy of the internal control system ▪ SOX created the Public Company Accounting Oversight Board (PCAOB) o Internal Control ▪ Methods and measures adopted to: • 1. Safeguard assets • 2. Enhance accuracy and reliability of accounting records • 3. Increase efficiency of operations • 4. Ensure compliance with laws and regulations ▪ A company’s internal auditors are employees who evaluate the effectiveness of their company’s internal controls o Principles of Internal Control Activities ▪ Establishment of Responsibility • Control is most effective when only one person is responsible for a given task • Establishing responsibility often requires limiting access only to authorized personnel, and then identifying those personnel ▪ Segregation of Duties • Different individuals should be responsible for related activities • The responsibility for record keeping for an asset should be separate from the physical custody of that asset ▪ Segregation of Related Activities • When one individual is responsible for all of the related activities, the potential for errors and irregularities is increased • Related purchasing activities should be assigned to different individuals o Ex) Ordering merchandise, receiving goods, and paying for merchandise • Related selling activities also should be assigned to different individuals o Ex) Making a sale, shipping the goods to the customer, and billing the customer ▪ Segregation of Record-Keeping from Physical Custody • The custodian of the asset is not likely to convert the asset to personal use if one employee maintains the record of the asset and a different employee has physical custody of the assets • This is especially important for cash and inventories because these assets are very vulnerable to fraud ▪ Documentation Proce
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