ACC240 Chapter 5: Fraud, Internal Control, Cash, and Financial Reporting

Vocabulary practice flashcards covering fraud concepts, the fraud triangle, Sarbanes-Oxley Act requirements, internal control principles, bank reconciliations, petty cash funds, cash equivalents, and auditor opinions from Chapter 5.

Fraud

An attempt to deceive others for personal gain, defined by the instructor as the intentional misuse of company resources (such as theft of assets or working other jobs/shopping on company time).

Corruption

A form of fraud involving the misuse of a position of power for personal gain, where an individual uses their authority to misuse assets or cover up misconduct with little interference.

Asset Misappropriation

A type of fraud involving the theft or inappropriate personal use of company assets, such as using a company car for a personal vacation without authorization.

Financial Statement Fraud

A type of fraud involving the intentional misrepresentation or falsification of financial statements (such as recording fictitious sales or uncollected cash) to make company performance appear favorable.

Fraud Triangle

A conceptual framework identifying the three elements necessary for fraud to occur, often compared to the three legs of a stool: incentive, opportunity, and rationalization.

Loan (or Debt) Covenant

Financial terms and conditions attached to borrowing agreements requiring a company to maintain specific financial benchmarks (e.g., minimum cash balance, retained earnings, or debt-to-equity ratio); violating them makes the loan callable immediately.

Sarbanes-Oxley Act (SOX)

Legislation enacted following major corporate scandals to deter fraud by imposing penalties of up to $\$5,000,000$ per count, up to $20$ years in prison per offense, restitution, and mandating stricter corporate governance.

Independent Audit Committee

A subgroup of a public corporation's board of directors composed of independent members to whom external auditors must report directly, bypassing executive managers who might be involved in fraud.

Internal Control System

Protective measures and procedures implemented by management to ensure assets are used appropriately, prevent unintentional errors, ensure information is accurate and timely, and comply with laws.

Establish Responsibility

An internal control principle whereby specific tasks and system permissions are assigned to designated individuals so it is clear who is authorized and accountable for each activity.

Segregating Duties

An internal control principle requiring that high-risk responsibilities—such as handling cash and recording cash transactions, or writing checks and signing checks—be divided between two or more employees.

Restricting Access

An internal control principle that limits physical access to easily stolen assets and documents (such as cash, blank checks, and inventory) and digital access to the accounting information system to authorized personnel only.

Documenting Procedures

An internal control principle that requires documenting operational activities and utilizing prenumbered business forms (such as prenumbered checks, invoices, and vouchers) to trace transactions.

Independent Verification

An internal control principle involving periodic, independent review of financial records, processes, and assets by internal or external auditors to ensure figures match reality.

Competent Personnel and Background Checks

A critical control measure emphasized by the instructor involving hiring qualified staff, verifying degrees and certifications, and performing criminal and credit background checks before placement.

Bank Reconciliation

An internal control procedure conducted monthly to reconcile differences between the cash balance reported on the bank statement and the cash balance in the company's ledger to determine the true cash balance.

Deposit in Transit

A deposit recorded in the company's cash ledger that has not yet been processed or recorded by the bank due to timing cutoffs; added to the bank statement balance during a bank reconciliation.

Outstanding Check

A check written and recorded in the company's books that has not yet cleared or been presented to the bank for payment; deducted from the bank statement balance during a bank reconciliation.

Not Sufficient Funds (NSF) Check

A deposited customer check that bounced because the customer lacked adequate funds; deducted from the company's book balance during reconciliation and requiring an adjusting entry debiting Accounts Receivable and crediting Cash.

Transposition Error

A common clerical error where two adjacent digits are inadvertently reversed (e.g., recording $\$230$ as $\$320$); recognized because the discrepancy between the numbers is always evenly divisible by $9$.

Petty Cash Fund

A small amount of physical cash kept on hand under the supervision of a designated custodian to reimburse employees immediately for minor, business-related expenses with proper receipts.

Form 10-K

The comprehensive annual financial report that publicly traded corporations are required to file with the Securities and Exchange Commission (SEC).

Form 10-Q

The quarterly financial report that publicly held companies are required to submit to the Securities and Exchange Commission (SEC).

Unqualified Audit Opinion

The most favorable audit opinion, stating that the financial statements are presented fairly and accurately in accordance with accounting standards and can be reliably used for decision-making.

Qualified Audit Opinion

An acceptable audit opinion indicating that the financial statements are generally reliable 'except for' a specific item or departure, such as an approved change in accounting methods (e.g., switching from FIFO to LIFO).

Disclaimer of Opinion

An auditor report stating that no opinion can be rendered because the auditors were prevented from obtaining sufficient evidence or access to necessary financial records.

Adverse Audit Opinion

A severe negative opinion indicating that the financial statements are materially misstated, misleading (e.g., using cash basis instead of accrual), and cannot be relied upon.

Cash Equivalents

Short-term, highly liquid investments that are easily convertible into cash and mature within $90$ days or less, such as money market funds or short-term treasury bills.

Restricted Cash

Cash that is legally or contractually committed for a specific purpose (such as a bond sinking fund) and cannot be used to pay current operating liabilities or shareholder dividends.