Jackson stuff Chapter 7: Fraud, Internal Control, and Cash

Vocabulary practice flashcards covering fraud concepts, internal control principles, cash controls, bank reconciliations, and cash management from Chapter 7.

Fraud

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

Fraud Triangle

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

Opportunity

An element of the fraud triangle that occurs when the workplace lacks sufficient controls to deter and detect fraud.

Financial Pressure

An element of the fraud triangle that occurs when employees have personal financial problems caused by too much debt or a desire to lead a lifestyle they cannot afford on their current salary.

Rationalization

An element of the fraud triangle that occurs when employees justify their dishonest actions in their own minds.

Sarbanes-Oxley Act (SOX)

Law applying to publicly traded U.S. corporations requiring them to maintain a system of internal control, mandating executive responsibility and independent auditor attestation, and creating the Public Company Accounting Oversight Board (PCAOB).

Internal Control

A process designed to provide reasonable assurance regarding the achievement of company objectives related to operations, reporting, and compliance.

Establishment of Responsibility

An internal control principle where control is most effective when only one specific person is assigned responsibility for a given task.

Segregation of Duties

An internal control principle requiring that different individuals be responsible for related activities, and that recordkeeping for an asset be kept separate from the physical custody of that asset.

Documentation Procedures

An internal control principle requiring the use of prenumbered documents accounted for in sequence, and the prompt forwarding of documents to the accounting department.

Physical Controls

Internal control measures relating to the safeguarding of assets and enhancing the accuracy and reliability of accounting records (e.g., safes, vaults, locked warehouses, passkeys, alarms, monitors, and time clocks).

Independent Internal Verification

An internal control principle involving the review of data prepared by employees, conducted periodically or on a surprise basis by an independent employee, with discrepancies reported to management.

Human Resource Controls

Internal control activities that involve bonding employees who handle cash, rotating employees' duties, requiring mandatory vacations, and conducting background checks.

Bonding

Obtaining insurance protection against theft by employees who handle cash.

Internal Auditors

Company employees who continuously evaluate the effectiveness of the company's internal control systems.

Cash Over and Short

An income statement account used to record differences between actual cash and the amount reported on cash register tapes or records.

Electronic Funds Transfer (EFT)

Disbursement and receipt systems that use wire, telephone, or computers to transfer funds from one location to another rather than paper currency or checks.

Voucher

An authorization form prepared for each expenditure in a voucher system.

Voucher System

A network of approvals by authorized individuals, acting independently, to ensure all disbursements by check are proper.

Petty Cash Fund

A cash fund used to pay relatively small amounts, operated under an imprest system to maintain internal control.

Occupational Fraud

Using one's occupation for personal gain through the misuse or misapplication of the employing company's resources or assets.

Asset Misappropriation

The most common ($89\%$ of cases) but least costly (median loss of $\$114{,}000$) type of occupational fraud, involving theft of cash on hand, fraudulent disbursements, false refunds, ghost employees, or personal purchases.

Corruption

A type of occupational fraud involving bribery, illegal gratuities, and economic extortion, accounting for $38\%$ of cases with a median loss of $\$250{,}000$.

Financial Statement Fraud

The least frequent ($10\%$ of cases) but most costly (median loss of $\$800{,}000$) type of occupational fraud, involving fictitious revenues, concealed liabilities and expenses, improper disclosures, or improper asset values.

Bank Reconciliation

The process of comparing the bank's balance with the company's book balance and explaining any differences to bring them into agreement.

Bank Statement

A monthly statement from a bank showing bank transactions and balances, including checks paid, debits, deposits, credits, and daily account balances.

Deposits in Transit

Deposits recorded by the depositor that have not yet been recorded by the bank.

Outstanding Checks

Issued checks recorded in the company's books that have not yet been paid or cleared by the bank.

NSF Check

A check not paid by a bank because of insufficient funds in the bank account on which it was drawn ("not sufficient funds").

Cash

Resources consisting of coins, currency, checks, money orders, and money on hand or on deposit in a bank or similar depository.

Cash Equivalents

Short-term, highly liquid investments that are readily convertible to known amounts of cash and so near their maturity that their market value is relatively insensitive to changes in interest rates.

Restricted Cash

Cash that is not available for general use but rather is held and set aside for a special purpose, reported separately on the balance sheet.

Treasurer

The company employee responsible for the management and oversight of a company's cash and liquid assets.

Cash Budget

A projection of anticipated cash inflows and outflows over a specified period (usually one to two years), divided into cash receipts, cash disbursements, and financing activities.