ACG 2021 Chapter Notes - Chapter 4: Identity Theft, Barcode, Cash Cash

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5 Feb 2017
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Internal Control and Cash
Describe fraud and it impact
o Fraud
Intentional misrepresentation of facts or negligence
Ultimate unethical act of business
Causes injury/damage to another party
Increased with commerce expansion because of
the internet
studies have shown that the percentage of losses
related to fraud from transactions originating in
“third world” or developing countries via the
Internet is even higher than in economically
developed countries.
Common types
Insurance
Check forgery
Medicare fraud
Credit card
Identity theft
o Fraud that impacts financial statements
Misappropriation of assets
Fraudulent financial reporting
Committed by employees
Theft of money or inventory
Bribery or kickback schemes
Overstate expense reimbursement
Most common
Committed by managers
False and misleading entries in the
books
Deceives investors and creditors
Most expensive
o Fraud Triangle
Motive - This usually results from either critical need or greed on the part of the person
who commits the fraud
Opportunity - usually arises through weak internal controls; It might be a breakdown in a
key element of controls, such as improper segregation of duties and/or improper access
to assets.
Rationalization distorted thinking that allows you to go along with the fraud
Explain the objectives and components of internal control
o Internal control
Primary way fraud and errors are prevented, detected, or corrected
Management and board of director implement a plan of organization or a system of
procedures
o Objectives of internal control
Safeguard assets. A company must safeguard its assets against waste, inefficiency, and
fraud.
Encourage employees to follow company policies. Everyone in an organization
managers and employeesneeds to work toward the same goals. A proper system of
controls provides clear policies that result in fair treatment of both customers and
employees.
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Promote operational efficiency. Companies cannot afford to waste resources. They work
hard to make a sale, and they don’t want to waste any of the benefits. If the company can
buy something for $30, why pay $35? Effective controls minimize waste, which lowers
costs and increases profits.
Ensure accurate, reliable accounting records. Accurate records are essential. Without
proper controls, records may be unreliable, making it impossible to tell which part of the
business is profitable and which part needs improvement. A business could be losing
money on every product it sellsunless it keeps accurate records for the cost of its
products.
Comply with legal requirements. Companies, like people, are subject to laws, such as
those of regulatory agencies like the SEC, the IRS, and state, local, and international
governing bodies. When companies disobey the law, they are subject to fines, or in
extreme cases, their top executives may even go to prison. Effective internal controls help
ensure compliance with the law and avoidance of legal difficulties.
The Sarbanes-Oxley act (SOX)
o SOX Provisions
Public companies must issue an internal control report, and the outside auditor must
evaluate and report on the soundness of the company’s internal controls.
A special body, the Public Company Accounting Oversight Board, has been created to
oversee the audits of public companies.
An accounting firm may not both audit a public client and provide certain consulting
services for the same client.
Stiff penalties await violators25 years in prison for securities fraud; 20 years for an
executive making false sworn statements.
o Internal controls shield the company assets from fraud, waste, and inefficiency
Components of internal control
o Control environment Owner(s) and managers acting ethically using the code of ethics
Corporate code of ethics
Prohibition against giving or taking bribes or kickbacks from customers or
suppliers
Prohibition of transactions that involve conflicts of interests
And that encourage good citizenship and corporate social responsibility
o Risk assessments Offers hints of where mistake and fraud might rise. Identify business risks
and establish procedures to deal with the risks
o Information system system to capture, process, and report transactions to provide accurate and
timely information; where accounting information enters, and exits.
o Control procedures built into the control environment and information system where
companies gain access to the five objectives of internal control above
o Monitoring of controls controls programmed into a company’s information technology;
internal (inside to safeguard assets) and external (test from outside to ensure accurate records)
auditors. Prohibits one employee/ group from process transactions completely
Internal control procedures
o Smart hiring practices the people being hired must be good and trust worthy with the
information they get on the job. To have this they go through background checks, training, and
having clear responsibilities.
o Separation of Duties separating 3 key duties of handling assets, keeping record, and transaction
approval
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