Ch. 4 Cash and Internal controls

Errors

Accidental errors in recording transactions.

Fraud

Intentionally deceiving others for personal gain or causing damage to a person.

Occupational fraud

Using one's occupation for personal gain by deliberately misusing employer's resources.

Fraud triangle

A model that explains the three elements necessary for fraud to occur: opportunity, motivation, and rationalization.

Opportunity

The situation that allows fraud to occur.

Motivation

The individual's reason or need to commit fraud, often related to financial pressures.

Rationalization

Justification for the deceptive act by the one committing the fraud.

Internal controls

Procedures implemented to eliminate the opportunity element of fraud.

Accounting scandals

Events where companies manipulated financial statements, leading to significant losses and legal consequences.

Sarbanes-Oxley Act of 2002

Legislation passed by Congress to enhance corporate governance and improve financial disclosures.

Monitoring

The process of overseeing internal activities and reporting deficiencies.

Control activities

Policies and procedures ensuring management directives are carried out.

Risk assessment

The identification and analysis of risk factors affecting a company's objectives.

Control environment

The overall ethical tone of the company regarding internal control.

Separation of duties

Procedures intended to separate employees' responsibilities to reduce fraud risk.

Physical controls

Procedures ensuring the safety of assets and accounting records.

Proper authorization

Procedures designed to prevent misuse of the company's resources.

Audits

Independent assessments of internal control procedures to detect deficiencies or fraud.

Collusion

Two or more individuals working together to circumvent internal controls.

Bank reconciliation

The process of matching the bank's cash balance with the company's recorded cash balance.

Timing differences

Discrepancies in cash records when transactions are recorded at different times by the company and the bank.

Petty cash fund

A small amount of cash kept on hand for minor purchases.