Chapter 7: Internal Control and Cash

Vocabulary flashcards covering the concepts of fraud, internal controls, the COSO framework, segregation of duties, auditing, and cash accounting procedures.

Fraud

Any act by the management or employees of a business involving an intentional deception for personal gain, including embezzlement, theft of assets, false claims, and financial statement fraud.

Fraud Triangle

A model identifying the three elements almost always present when a fraud occurs: perceived pressure, rationalization, and perceived opportunity.

Vice Pressure

A form of perceived financial pressure originating from personal addictions or habits such as gambling, drugs, or alcohol.

Tone at the Top

The ethical attitudes and behaviors demonstrated by top management (such as the CEO or president) that establish the organization-wide ethical culture.

COSO Framework

A structured internal control model released in 1992 and updated in 2013 by the Committee on Sponsoring Organizations of the Treadway Commission comprising five key components: control environment, risk assessment, control activities, information and communication, and monitoring activities.

Control Environment

The COSO component that sets the overall tone of an organization, encompassing ethical values, management philosophy, organizational structure, assignment of authority, and competence of personnel.

Risk Assessment

The COSO component that involves an ongoing, dynamic process of identifying and analyzing internal and external risks that threaten an organization's objectives.

Internal Controls

Policies and procedures established by a business to ensure reliable accounting data, safeguard assets, promote compliance with company policies, and evaluate organizational performance to provide reasonable assurance.

Prevention Control

An internal control activity designed to deter or prevent an error, problem, or fraud before it can take place.

Detection Control

An internal control activity designed to discover and expose errors, irregularities, or fraud shortly after they occur.

Segregation of Duties

An internal control principle mandating that management divide responsibilities so no single employee handles the authorization, recording, and custody functions of a transaction.

Benford's Law

A numerical phenomenon discovered by Frank Benford establishing that in naturally occurring datasets, the digit 1 appears as the leading digit approximately $30.1\%$ of the time, whereas the digit 9 appears less than $5\%$ of the time.

Accounts Receivable Confirmation

A detection control procedure where a business directly contacts customers to verify and confirm the outstanding balances owed.

Internal Auditing

An independent appraisal activity within an organization that evaluates whether adequate internal controls are in place and whether they are operating effectively.

Fidelity Bond

An insurance policy that provides financial compensation to a company for losses resulting from theft committed by specified employees.

Employee Collusion

A situation where two or more employees cooperate to bypass or defeat prescribed internal controls.

Sarbanes-Oxley Act (SOX)

Federal legislation enacted following major corporate scandals requiring publicly traded U.S. corporations to maintain adequate internal controls, with management certifying reliability under threat of severe fines and prison sentences.

Cash

An asset class comprising coins, currency, checks, money orders, traveler's checks, and bank deposits that are accepted for deposit and free from restrictions on paying debts.

Certificate of Deposit (CD)

A bank-issued interest-bearing security where money is invested for a fixed duration (commonly three months to one year); accounted for as an investment rather than cash.

Not-Sufficient-Funds (NSF) Check

A check drawn on an account with insufficient funds to cover the specified amount when presented to the bank; classified on the balance sheet under Other Receivables.

Compensating Balance

A minimum bank balance that a borrower is required by a lending bank to maintain in its account as part of a loan agreement.

Cash Equivalents

Short-term, highly liquid, risk-free investments with original maturities of $90$ days or less, such as U.S. Treasury bills and money market funds.

Remittance Advice

A document sent along with a customer's payment check detailing the customer name, amount paid, and reference information such as an invoice number.

Remittance List

A list compiled daily by mailroom personnel containing the details of all customer checks received, including check number, customer identifier, and amount received.