Ch 7 flashcards

Fraud

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

Fraud Triangle

A model that explains the three factors that contribute to fraudulent activity: opportunity, financial pressure, and rationalization.

Opportunity (Fraud Triangle)

Occurs when the workplace lacks sufficient controls to deter and detect fraud.

Financial Pressure (Fraud Triangle)

When employees experience personal financial problems, often resulting in feelings of needing extra money.

Rationalization (Fraud Triangle)

The way employees justify their dishonest actions, believing they are acceptable.

Sarbanes-Oxley Act (SOX)

A law enacted to protect investors by improving the accuracy and reliability of corporate disclosures in financial statements.

Internal Control

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

COSO’s Internal Control Framework

A framework outlining the primary components of internal control systems, including control environment, risk assessment, control activities, information and communication, and monitoring.

Establishment of Responsibility

Assigning responsibility to specific employees for certain tasks to increase accountability.

Segregation of Duties

A principle that mandates separating responsibilities among different individuals to reduce the risk of fraud.

Documentation Procedures

Using prenumbered documents to maintain accurate records and prevent duplicate transactions.

Physical Controls

Measures to safeguard assets which enhance the accuracy and reliability of accounting records.

Independent Internal Verification

The periodic review of data prepared by employees, typically performed by an independent party.

Human Resource Controls

Policies governing employee hiring, training, and conduct that help mitigate risks of fraud.

Petty Cash Fund

A small amount of cash kept on hand for minor expenses; managed through a system of receipts and reimbursement.

Cash Management Principles

Strategies to manage cash effectively by increasing speed of collections, maintaining low inventory, and timing expenditures.

Bank Reconciliation

The process of comparing the bank's balance with the company's balance to determine discrepancies.

Cash Equivalents

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

Restricted Cash

Cash that is not available for general use but earmarked for a special purpose, reported separately on the balance sheet.

Voucher System

A network of approvals by authorized individuals to ensure proper disbursements.

Electronic Funds Transfer (EFT)

The transfer of funds electronically from one bank account to another.

Cash Receipts Controls

Procedures aimed at controlling cash incoming to a business to prevent theft and inaccuracies.

Cash Disbursement Controls

Controls governing the payment of cash to ensure accurate and legitimate expenditures.

Documentation Procedures

Processes for maintaining records and ensuring all transactions are accounted for accurately.

Fraudulent Claims

Claims made with the intent to deceive, often for wrongful gain.

Internal Auditors

Employees responsible for assessing the effectiveness of internal controls and compliance with laws.

Outsourced Auditors

External auditors who independently review the adequacy of a company’s internal control systems.

Natural Controls

Controls that are inherent to the environment of the organization, such as physical barriers.