Chapter 8 Powerpoints ACC 120

Fraud

A dishonest act by an employee resulting in personal benefit to the employee at a cost to the employer, often influenced by Opportunity, Financial Pressure, and Rationalization (Fraud Triangle).

Sarbanes-Oxley Act (SOX)

Requires publicly traded U.S. corporations to maintain a system of internal control to ensure reliability and effectiveness in operations and reporting.

Internal Control

A process designed to provide reasonable assurance regarding the achievement of objectives related to operations, reporting, compliance, and the prevention of fraud through measures like Segregation of Duties and Establishment of Responsibility.

Control Environment

The overall attitude of management and employees regarding the importance of controls, which is fundamental for effective Internal Control.

Documentation Procedures

Companies should use prenumbered documents and ensure all documents are accounted for to maintain proper cash handling and record keeping.

Physical and Human Resource Controls

Measures such as safes, alarms, and employee bonding or vacation requirements are used to safeguard assets and prevent fraud.

Independent Internal Verification

Periodic verification of records by an employee who is independent of those responsible for maintaining the records to ensure accuracy.

Cash Management Controls

Procedures ensuring proper handling, recording of cash receipts, and processes like Bank Reconciliation to ensure accuracy of cash records.

Cash Equivalents and Restricted Cash

Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash, while restricted cash is reserved for specific purposes and not available for general use.

What is Opportunity in the Fraud Triangle?

Opportunity refers to the circumstances that allow employees to commit fraud, often due to weak internal controls.

What is Financial Pressure in the Fraud Triangle?

Financial Pressure involves the motivation behind committing fraud, often stemming from personal financial problems or desires.

What is Rationalization in the Fraud Triangle?

Rationalization is the mental process by which an employee justifies fraudulent behavior, believing it to be acceptable.

What is Segregation of Duties?

A control principle that divides responsibilities among different people to reduce the risk of error or fraud.

What is Establishment of Responsibility?

Assigning specific responsibilities to individuals to ensure accountability within internal controls.

What are Prenumbered Documents?

Documents that are pre-numbered to prevent unauthorized use and to ensure that all transactions are accounted for.

What are Physical Controls?

Security measures like locks and safes that protect assets from theft or misuse.

What is Bank Reconciliation?

The process of comparing a company's cash records with the bank's records to ensure accuracy.

What is Employee Bonding?

A fidelity bond that protects a company against losses from employee theft or dishonesty.

What is a Control Activity?

Specific policies and procedures implemented to help ensure that management's directives are carried out, including checks and balances.