acct 200 chapter 4

Fraud

intentionally deceiving for personal gain or damaging another person

Occupational fraud

using power/access/your position to commit fraud

Fraud triangle

opportunity, motivation, rationalization

Opportunity

situation allows fraud to occur

Motivation

someone feels the need to commit fraud (example need for money)

Rationalization

justification for the act

Internal controls

plans to safeguard company’s assets and improve accuracy and reliability of accounting information

Accounting scandals

Enron (avoided reporting debt/losses) and WorldCom (overstated assets/profit), prompted SOX passing in 2002

Sarbanes-Oxley Act (SOX)

established guidelines related to internal control procedures (must have them) and auditor-client relations (limits), applies to all companies with SEC

Section 404 of SOX

requires management and auditors to document and assess effectiveness of a company’s internal controls

Components of internal control (pyramid low to high)

control environment, risk assessment, control activities, monitoring, information/communication

Control environment (CIC)

training, assignments, culture set overall ethical tone of company

Control activities (CIC)

procedures to put in place like authorizations, reconciliations, and separation of duties

Monitoring

improving, adjusting, and communicating results about control deficiencies

Separation of duties

set of procedures intending to separate employees’ duties for authorizing transactions, recording transactions, and controlling the related assets

Physical controls

set of procedures that ensures assets and accounting records are kept safe

Proper authorization

set of procedures to prevent improper use of company resources

Preventative control activities

more efficient, examples include separation of duties, physical controls, proper authorization, employee management, e-commerce control

Detective controls

reconciliation, performance reviews, audits

Reconciliations

management periodically determines if physical assets agree with accounting records

Performance reviews

performance of individuals or processes checked against expected performance

Audits

hire independent auditor to assess internal control procedures to detect fraudulent behavior

Collusion

two or more people acting in coordination to circumvent internal controls

Cash

coins/currency, checks received, balances in savings/checking, credit/debit card sales, cash equivalents

Cash equivalents

investments that mature within three months from date of purchase (money market funds, treasury bills, certificates of deposit)

Controls over receipt of cash/checks

designate different employees to receive, deposit, and record cash/checks, independent verification of cash receipts

RECORDING CREDIT CARD SALE ($2000 sale, service fee of 3%/$60)

debit cash $1,940 and service fee expense $60, credit service revenue 2,000)

Fees for debit cards are typically

lower than credit card fees

Controls over cash disbursements

use something traceable (d/c card, check), require 2 signatures for larger checks, separate duties

RECORDING PURCHASE WITH CASH/CHECK/DEBIT CARD (company pays 1000 to advertise)

debit advertising expense 1000, credit cash 1000

RECORDING PURCHASE WITH CREDIT CARD (company pays 1000 to advertise)

debit advertising expense 1000, credit accounts payable 1000

Bank reconciliation

matches balance of cash in bank with balance of cash in company records

Timing differences and errors

can cause bank record and company record to be different

3 steps for bank reconciliation

reconcile bank cash balance, reconcile company cash balance, update company’s cash account

Deposits outstanding

cash receipt not added to bank record (increases bank cash balance)

Checks outstanding

checks company has written that haven’t been subtracted from bank’s record (decreases bank cash balance)

Common items that increase company’s cash balance in reconciliation

bank collections on company’s behalf, interest received on average daily balance

Common items that decrease company’s cash balance in reconciliation

EFTs, debit card purchases, service fees, unrecorded payments (NSF checks)

Petty cash fund

small amount of cash kept on hand to pay for minor purchases (establish, recognize expenditures, replenish)

ESTABLISH PETTY CASH FUND ($200)

debit petty cash, credit cash

RECOGNIZE PETTY CASH FUND EXPENDITURES

debit expense, credit cash/accounts payable for credit card

REPLENISH PETTY CASH FUND

debit expense, credit cash