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Chapter 6

MGT 11A Chapter Notes - Chapter 6: Public Company Accounting Oversight Board, Internal Control, Cash Cash


Department
Management
Course Code
MGT 11A
Professor
John Hancock
Chapter
6

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CHAPTER 6: REPORTING AND ANALYZING CASH, FRAUD, AND INTERNAL CONTROL
FRAUD AND INTERNAL CONTROL
Purpose of Internal Control
Sarbanes-Oxley Act (SOX)
requires managers and auditors of public companies to document and verify
internal controls
Auditors’ work is overseen by Public Company Accounting Oversight Board
(PCAOB)
Committee of Sponsoring Organizations (COSO)
Committee of Sponsoring Organizations (COSO): lists 5 ingredients of internal
control
Control Environment: company structure, ethics, and integrity for internal
control
Risk Assessment: identify, analyze, and manage risk factors
Control Activities: policies and procedures to reduce risk of loss
Information and Communication: reports to internal and external parties
Monitoring: regular review of internal control effectiveness
Principles of Internal Control
Principles of Internal Control are applied to all companies to:
Establish responsibilities: Assign to one person so know where the problem
occured
Maintain adequate records: helps protect assets and managers monitor company
activities
Insure assets and bond key employees
To employees handling lots of cash and easily transferable assets
Separate recordkeeping from custody of assets
Person controlling or has access to an asset must not have access to
that asset’s accounting records
Divide responsibility for related transactions
Ensures work of one person acts as a check on the other to prevent
fraud and errors
Separation of Duties: responsibility for a transaction should be divided
between 2 or more individuals or departments
Apply technological controls
Perform regular and independent reviews
Done by internal auditors that are not directly involved in the activities
test companys financial records and evaluate effectiveness of internal
controls
Limitations of Internal Control
1) Human error or fraud
Human error: carelessness, misjudgment, or confusion
Human fraud: people intentionally defeating internal controls, such as
management override, for personal gain
Driven by Triple Treat of fraud:
Opportunity: internal control weaknesses in a business
Pressure: financial, family, and societal stressors to succeed
Rationalization: employees justifying fraudulent behavior
2) Cost-benefit Principle: costs of internal controls must not exceed their benefits
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