Chapter 7 - Internal Control and Cash.docx

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Western University
Business Administration
Business Administration 2257
Amy Shuh

Chapter 7: Internal Control and Cash September 18, 2013 Michael Hua Fraud and Internal Control FRAUD  Fraud – an intentional act to misappropriate (steal) assets or misstate financial statements  Sarbanes-Oxley Act (SOX) – a reaction to accounting scandals that requires public companies to maintain adequate systems of internal controls and to have senior company officers sign certificates to that effect INTERNAL CONTROL  Internal Control – consists of all the related methods and measures adopted within a company to help it achieve reliable financial reporting, effective and efficient operations, and compliance with relevant laws and regulations  GOOD internal control systems have five primary components: 1. Control Environment – it is the responsibility of management to make it clear that the organization values integrity, and that unethical activity will not be tolerated 2. Risk Assessment – companies must identify and analyze the various factors that create risk to the business and determine how to manage these risks 3. Control Activities – to reduce the occurrence of fraud, management must design policies and procedures to address the specific risks faced by the company 4. Information and Communication – the system must capture and communicate all pertinent information both down and up the organization and communicate it to appropriate external parties 5. Monitoring  Authorization An essential characteristic of internal control is the assignment of responsibility to specific employees  This is most effective when only one person is authorized to perform a specific task  Segregation of Duties Segregation of duties is essential in a system of internal control because the responsibility for related activities should be assigned to different individuals  When the same individual is responsible for related activities, the potential for errors and irregularities is increased  Documentation Documents provide evidence that transactions and events have occurred  Physical Controls Physical controls can be used to safeguard assets and enhance the reliability of accounting records  Independent Checks of Performance Independent review is necessary because employees can forget or intentionally fail to follow internal controls, or they might become careless if there is no one to observe and evaluate their performance  Internal Reviews – Independent internal reviews are especially useful in comparing accounting records with existing assets to ensure that nothing has been stolen  External Reviews – independent of the company; reports on whether or not the company’s financial statements fairly present its financial position and results of operations  External auditors plan and perform an audit to obtain reasonable assurance that the financial statements don’t have any significant errors  Human Resource Controls: 1. Conduct thorough background checks 2. Bonding of employees who handle cash  Bonding means having insurance protection against theft of assets by dishonest employees 3. Rotating employees’ duties and requiring employees to take vacations Control Activities Over Cash Receipts Over-the-Counter Receipts  Internal control over cash receipts is more effective when cash receipts are deposited intact into the bank account on a daily basis or are made by electronic funds transfer Mail-In Receipts  When a cheque is received in the mail, it is usually accompanied by a remittance advice, which is th
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