Chapter 7 (Fraud, Internal Control, Cash)

What is fraud?

A dishonest act by an employee that results in personal benefit at the employer's cost

What are the three components of the Fraud Triangle?

Opportunity, Rationalization, Financial Pressure

What is the main purpose of internal control?

To safeguard assets, enhance accounting reliability, increase operational efficiency, and ensure legal compliance

What are the 6 principles of internal control?

1) Establishment of responsibility 2) Segregation of duties 3) Documentation procedures 4) Physical controls 5) Independent internal verification 6) Human resource controls

What is segregation of duties?

Different individuals should handle related activities; record-keeping should be separate from physical custody of assets

What is SOX?

Sarbanes-Oxley Act - requires public companies to maintain internal controls and have independent auditors verify them

What are the main reconciling items in a bank reconciliation?

1) Deposits in transit 2) Outstanding checks 3) Bank service charges 4) NSF checks

Why perform bank reconciliations?

To verify accuracy of both bank and company records and identify any discrepancies or errors

What are the main limitations of internal control?

1) Cost vs. benefit considerations 2) Human error/fatigue 3) Potential for collusion 4) Size limitations in small businesses

Why use prenumbered documents?

To prevent double recording or omission of transactions and ensure all documents are accounted for

What are key HR controls?

1) Bonding employees 2) Requiring vacations 3) Rotating duties 4) Conducting background checks