ACCT 200 Lecture Notes - Lecture 7: Internal Control, Accounting Scandals, Child Custody

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mauvecricket694

14 Sep 2016

School

University of Arizona

Department

Accounting

Course

ACCT 200

Professor

Silverberg

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Document Summary

Fraud: a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. Three factors contribute to fraudulent activity: opportunity, financial pressure, and rationalization. It was initiated to combat numerous accounting scandals. Required to maintain a system of interval control. Corporate executives and boards of directors must ensure that these controls are reliable and effective. Independent outside auditors must attest to the adequacy of the internal control system. Example: enron had been reporting expenses as revenues to boost themselves. Methods and measures adopted to: safeguard assets, enhance the reliability of accounting records, increase efficiency of operations, ensure compliance with laws and regulations. Six principles of internal control activities: establishment of responsibility. Control is most effective when only one person is responsible for a given task. Limit access only to authorized personnel: segregation of duties. Different individuals should be responsible for related activities.

Related Questions

1â28. Multiple Choice Questions
Select the best answer for each of the following items and give reasons for your choice.
a. Which of the following best describes the relationship between assurance services and
attest services?
(1) While attest services involve fi nancial data, assurance services involve nonfi nancial data.
(2) While attest services require objectivity, assurance services do not require objectivity.
(3) Both attest and assurance services require independence.
(4) Attest and assurance services are different terms referring to the same types of services.
b. Which of the following has primary responsibility for the fairness of the representations
made in fi nancial statements?
(1) Clientâs management.
(2) Independent auditor.
(3) Audit committee.
(4) AICPA.
c. The most important benefi t of having an annual audit by a public accounting fi rm is to:
(1) Provide assurance to investors and other outsiders that the fi nancial statements are reliable.
(2) Enable offi cers and directors to avoid personal responsibility for any misstatements in
the fi nancial statements.
(3) Meet the requirements of government agencies.
(4) Provide assurance that illegal acts, if any exist, will be brought to light.
d. The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board
(PCAOB). Which of the following is not one of the responsibilities of that board?
(1) Establish independence standards for auditors of public companies.
(2) Review fi nancial reports fi led with the SEC.
(3) Establish auditing standards for audits of public companies.
(4) Sanction registered audit fi rms.
e. Which of these organizations has the responsibility to perform inspections of auditors of
public companies?
(1) American Institute of Certifi ed Public Accountants.
(2) Securities and Exchange Commission.
(3) Financial Accounting Standards Board.
(4) Public Company Accounting Oversight Board.
f. Governmental auditing, in addition to including audits of fi nancial statements, often
includes audits of effi ciency, effectiveness, and:
(1) Adequacy.
(2) Evaluation.
(3) Accuracy.
(4) Compliance.
g. In general, internal auditorsâ independence will be greatest when they report directly to the:
(1) Financial vice president.
(2) Corporate controller.
(3) Audit committee of the board of directors.
(4) Chief executive offi cer.
h. Which of the following did not precipitate the passage of the Sarbanes-Oxley Act of 2002
to regulate public accounting fi rms:
(1) Disclosures related to accounting irregularities at Enron and WorldCom.
(2) Restatements of fi nancial statements by a number of public companies.

(3) Conviction of the accounting fi rm of Arthur Andersen LLP.
(4) Ethical scandals at the AICPA.
i. Which of the following organizations establishes accounting standards for U.S. government
agencies?
(1) The Financial Accounting Standards Board.
(2) The Governmental Accounting Standards Board.
(3) The Federal Accounting Standards Advisory Board.
(4) The Public Company Accounting Oversight Board.
j. Which of the following is correct about forensic audits?
(1) All audit engagements are forensic in nature.
(2) Forensic audits are performed by law fi rms; they are not performed by CPA fi rms.
(3) Forensic audits are equivalent to compliance audits.
(4) Forensic audits are usually performed in situations in which fraud has been found or is
suspected.
k. What best describes the purpose of the auditorsâ consideration of internal control in a
fi nancial statement audit for a nonpublic company?
(1) To determine the nature, timing, and extent of audit testing.
(2) To make recommendations to the client regarding improvements in internal control.
(3) To train new auditors on accounting and control systems.
(4) To identify opportunities for fraud within the clientâs operations.
l. Which of the following is an example of a compliance audit?
(1) An audit of fi nancial statements.
(2) An audit of a companyâs policies and procedures for adhering to environmental laws
and regulations.
(3) An audit of a companyâs internal control over fi nancial reporting.
(4) An audit of the effi ciency and effectiveness of a companyâs legal department.

coralbadger702

Required: After reading the Bye, Bye SOX? Article comment on the issue of small business compliance with Section 404 of SOX

Bye, Bye, SOX?
The Sarbanes-Oxley Act (SOX)	SOX compliance has been extended
may be declawed by upcoming	four times, but they wonât need to
U.S. Congress and	comply at all if the Garrett-Adler
Supreme Court decisions.	amendment makes it to the Senate
The House of Representatives	floor as a standalone bill.
recently voted to approve the	SOX also established the
Garrett-Adler amendment, which	PCAOB to oversee and regulate
would exempt small companies	audit firms. PCAOB operates under
from SOX Section 404 provisions,	the supervision of the Securities
while the Supreme Court is considering	and Exchange Commission (SEC),
the constitutionality of the	which also appoints PCAOB members.
Public Company Accounting Oversight	It is funded by fees charged to
Board (PCAOB).	audited firms. When it was established,
These developments may have	Congress wanted the board
long-term implications for SOX, the	to be separate, with its own funding
2002 legislation passed in the wake	stream, and outside normal civil
of the Enron, WorldCom, and Tyco	service laws so it could attract
scandals. The outcomes may also	highly qualified specialists. PCAOB
have implications for records managers,	membersâ salaries are more than
information technology specialists,	$500,000 and are reviewed by the
and compliance officers	SEC.
who devise and implement company	Pro-business advocates, represented
controls.	by the Free Enterprise
Section 404 of SOX requires	Fund, argue that the PCAOBâs governance
company auditors to attest to the	structure is unconstitutional
soundness of the firmâs internal	because it is an independent
controls and financial statements.	agency that does not allow for the
Internal controls may include anything	president to appoint members. Additionally,
from transaction approval authorizations	because only the president
to records retention	can remove SEC commissioners
programs. This provision is widely	for cause, and because
blamed for an increase in auditorsâ	the SEC can only remove PCAOB
fees, as well as increased expenditures	members for cause, some court
to ensure that proper internal	members believe this is a formerly
controls are in place.	unrecognized limit of the presidentâs
Small firms â those with	powers that may contradict
less than $75 million in	the constitution.
market capitalization	The Supreme Court will take up
â have protested that	the issue soon, and some legal experts
compliance with SOX 404 would	believe that SOX could be
cost them a disproportionate share	abolished completely if the court
of their earnings. The complaint is	rules the PCAOB unconstitutional.
supported by an independent study
conducted at Pennsylvania State
University, which showed that
firms just over the $75 million
mark paid nearly $700,000 more in
audit fees and had average earnings
of negative $1.4 million in 2004

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ACCT 200 Lecture Notes - Lecture 7: Internal Control, Accounting Scandals, Child Custody

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