Abby's Accounting

Internal Control is the plan and measures designed to:

1. Safeguard Assets

2. Encourage employees to follow company policies

3. Promote operational efficiency

4. Ensure accurate and reliable accounting records

Committee of Sponsoring Organizations (COSO)

Provides thought leadership related to

1. enterprise risk management

2. internal control

3. fraud deterrence

COSO’s mission is to…

develop frameworks and guidance to help companies improve their internal controls and reduce fraud in organizations.

What are public companies?

Companies that sell stock to the general public and are required by the U.S. Congress to maintain a system of internal controls

The Sarbanes-Oxley Act (SOX) requires…

companies to review internal control and take responsibility for the accuracy and completeness of their financial reports

Public companies must issue an internal control report, which is…

a report by management describing its responsibility for and the adequacy of internal controls over financial reporting

Who must evaluate internal controls?

An auditor

Who oversees the work of auditors of public companies?

The Public Company Accounting Oversight Board (PCAOB)

What are accounting firms not allowed to do?

Accounting firms are not allowed to audit a public company and also provide certain consulting services for the same client

What penalties await violators of securities fraud and false sworn statements?

25 years in prison for securities fraud and 20 years for an executive making false sworn statements

A business can achieve its internal control objectives by addressing five components:

Control procedures, Risk assessment, Information system, Monitoring of controls, Environment

Internal controls are monitored by…

internal auditors (employees of the company) and external auditors (outside accountants).

What’s needed for effective internal controls?

1. Competent, reliable, and ethical personnel

2. Assignment of responsibilities

3. Separation of duties

4. Audits

5. Documents

6. Electronic devices

7. E-commerce

What is separation of duties?

Division of responsibilities between two or more people to limit fraud and promote accuracy of accounting records (separating operations from accounting, separating the custody of assets from accounting)

Internal audits are performed by employees of the company while external audits are performed by…

independent auditors (not employees).

How can an electronic device be used as an internal control procedure?

Sensors attached to inventory can reduce theft

What does encryption do in E-commerce?

Encryption rearranges plain-text messages by a mathematical process

What is the purpose of a firewall?

Firewalls limit access into a local network

What are mediums of exchange that have no actual value or physical form and are not legal tender and are not backed by any government or legal entity?

Cryptocurrencies (examples: Bitcoin, Ethereum, and Ripple)

Why might a company accept cryptocurrencies?

Cryptocurrencies are more resistant to counterfeiting and provide faster, more secure transactions

Cryptocurrencies work on a…

blockchain

True or false: Internal controls cannot completely prevent fraud.

True

What is collusion?

Collusion is when two or more people work together to circumvent internal controls and defraud a company

True or false: The stricter the internal controls, the higher the costs.

True

Internal controls are judged based on their…

cost versus benefit.

A receipt of cash over the counter in a store involves a…

point-of-sale terminal (cash register).

Many companies receive checks by mail for…

payments of of service or merchandise

What is step one of cash receipts by mail?

All incoming mail is opened by a mailroom employee. The mailroom then sends all customer checks to the treasurer and all remittance advices to the accounting department.

What is step two of cash receipts by mail?

The treasurer has the cashier deposit the checks in the bank. The cashier receives a deposit receipt.

What is step three of cash receipts by mail?

The accounting department uses the remittance advices to record the journal entries to Cash and customer accounts.

What is step four of cash receipts by mail?

As a final control, the controller compares the following records for the day:

1. Bank deposit amount from the treasurer

2. Debit to Cash from the accounting department