Internal Controls and Inventory Accounting

Vocabulary flashcards covering internal control principles, types of fraud, human resource compliance, and inventory accounting concepts from the lecture.

Sarbanes-Oxley Act (SOX)

Federal legislation applicable to publicly traded companies designed to prevent fraud by requiring proper internal controls, checks and balances, independent audits, tracking of employee certifications, and monitoring of organizational structures.

Internal Control

A company's system of policies and procedures designed to safeguard assets, enhance the reliability of accounting records, increase operational efficiency, and ensure compliance with laws and regulations.

Establishment of Responsibility

An internal control principle stating that control is most effective when only one designated individual is assigned accountability for a specific task or asset.

Segregation of Duties

An internal control principle requiring that different individuals are responsible for related activities and that the physical custody of an asset is kept separate from its accounting record-keeping.

Documentation Procedures

The practice of using pre-numbered documents, such as checks, purchase orders, and invoices, to ensure all transactions are accounted for and can be matched against receiving reports.

Independent Internal Verification

An internal control activity where an individual outside a specific department or function reviews records, compares reports, and identifies discrepancies.

Board of Directors

A group elected by shareholders to oversee management, set the company's direction, and ensure proper organizational checks and balances.

Form I-9

An employment eligibility verification form required by employers to confirm that an employee is either a U.S. citizen or legally registered to work in the United States.

Remittance Advice

A document accompanying a check received by mail that is forwarded to the accounting department for cash receipt recording, separate from the employee who deposits the check.

Asset Misappropriation

A type of employee fraud involving the theft or misuse of company resources, such as taking cash directly or moving physical inventory off-site.

Financial Statement Fraud

A type of fraud involving intentional misstatements in financial reports, such as underreporting expenses or overvaluing defective inventory to artificially inflate net income and assets.

Ponzi Scheme

A fraudulent investment scam where returns are paid to existing investors using capital acquired from new investors rather than from legitimate business earnings, exemplified by Bernard Madoff in 2008.

Consignment Inventory

Goods held by one company on behalf of another party who retains legal ownership; such goods must be excluded from the holding company's inventory count.

FOB Shipping Point

Shipping terms specifying that legal ownership and title of goods transfer to the buyer the moment they leave the seller's shipping dock, meaning the buyer owns the goods in transit and pays the freight.

Inventory Error in Ending Inventory

An accounting error where overstating the ending inventory causes the cost of goods sold to be understated and net income to be overstated.

LIFO (Last-In, First-Out)

An inventory valuation method where the costs of the most recently purchased, higher-priced items are expensed first during periods of inflation, yielding a higher cost of goods sold, lower net income, and lower income taxes.

FIFO (First-In, First-Out)

An inventory valuation method where the oldest purchase costs are expensed first, resulting in a lower cost of goods sold and higher net income compared to LIFO during periods of inflation.