Accounting ch 7 NOTES

Fraud

A dishonest act by an employee that results in personal benefit at a cost to the employer.

Fraud Triangle

The three factors that contribute to fraudulent activity: pressure, opportunity, and rationalization.

Sarbanes-Oxley Act (SOX)

Applies to publicly traded U.S. corporations and requires them to maintain a system of internal control.

Internal Control

Methods and measures adopted to safeguard assets, enhance reliability of accounting records, increase efficiency of operations, and ensure compliance with laws.

Control Environment

The overall atmosphere in which controls are conducted and managed in an organization.

Risk Assessment

The process of identifying and analyzing risks that could prevent the organization from achieving its objectives.

Control Activities

The specific actions taken to mitigate risks and achieve objectives.

Documentation Procedures

Systems that ensure all documents are properly filled out and accounted for in a consistent manner.

Segregation of Duties

A principle of internal control that prevents fraud by ensuring that different individuals are responsible for related activities.

Independent Internal Verification

The process of verifying records periodically by an employee who is not involved in the activities being verified.

Human Resource Controls

Controls that involve background checks, bond employees who handle cash, and require vacations.

Cash Equivalents

Short-term, highly liquid investments that are easily convertible to known amounts of cash.

Restricted Cash

Cash that is not available for general use but rather is restricted for a special purpose.

Electronic Funds Transfer (EFT)

Disbursement systems that use electronic means to transfer cash from one location to another.

Bank Reconciliation

The process of comparing the bank statement with the company's accounting records to ensure accuracy.

Petty Cash Fund

A fund used to pay small amounts for miscellaneous expenses.

NSF Check

A check that is not paid by a bank due to insufficient funds in the account.

Bonding Employees

A practice where employees who handle cash are insured against theft or fraud.

Prenumbered Documents

Documents that are numbered in advance for the purpose of tracking and preventing fraud.