ACCT200 Exam Review (Chapter 4)

Internal Controls

• plans to safeguards company assets and improve accuracy/reliability of accounting

• aim to eliminate the opportunity element of fraud

Fraud Triangle

Opportunity, Motivation, Rationalization

Occupational Fraud

misuse of one’s occupation for personal enrichment

Sarbanes-Oxley Act (SOX) of 2002

• passed in response to accounting scandals

• applies to public companies filing with the SEC

Public Company Accounting Oversight Board (PCAOB)

establishes auditing standards

Corporate Executive Accountability

executives must personally certify financial statements; sever penalties for fraud

Nonaudit Services

prohibits auditors from performing certain nonaudit services for clients

Auditor Rotation

lead auditor must rotate every five years

Internal Control (Section 404)

management must document and assess internal control effectiveness; auditions must express an opinion on management’s assessments

Components of Internal Control

• Control Environment

• Risk Assessment

• Control Activities

• Monitoring

• Information and Communication

Control Environment

overall attitudes and actions of management

Risk Assessment

consideration of internal and external risk factors

Control Activities

policies and procedures to protect assets

Preventative Controls

• separation of duties: separate assets and records

• physical controls: safeguard assets and records

• proper authorization: prevent improper use of resources

• employee management: guidance and training

• e-commerce controls: secure online transactions

Defective Controls

• reconciliations: compare physical assets to accounting records

• performance reviews: compare actual to expected performance

• audits: independent assessment of internal controls

Monitoring

ongoing assessment of internal controls

Information and Communication

reliable accounting information system

Limitations of Internal Control

• systems can have misstatements

• top-level employees can override controls

• cannot guarantee company success or survival

Collusion

two or more people circumventing controls

Cash and Cash Equivalents

• cash: coins, currency, checks received, balances in savings/checking accounts, credit/debit card sales

• cash equivalents: investments maturing within three months from purchase date

Controls over Cash Receipts

• daily deposits

• independent verification of cash receipts

• accept credit/debit cards to limit cash handling

Credit Card Sales

company receives cash less service fees

• Debit Cash + Service Fee Expense, Credit Service Revenue

Debit Card Sales

funds withdrawn directly from cardholder’s bank, lower fees than credit cards

Separation of Duties

different employees for receiving cash, depositing, and recording

Steps in Bank Reconciliation

• Reconcile Bank’s Cash Balance

• Reconcile Company’s Cash Balance

• Update Company’s Cash Account

Employee Purchases

• Petty Cash Fund

• Company-Issued Debit/Credit Cards

• Internal Controls for Employee Expenditures